It was the year when China’s new leadership turned away from stimulus policies, which had been based on creating a wealth effect via a lending and property bubble. The impact of this change of direction is still hardly recognised in mainstream commentary, despite it having already led to a major collapse in prices for oil and other commodities.
February’s Research Note, China’s Bank Lending: from $1tn to $10tn and Back Again?, gave my view of how these new policies would impact China and the world. The key is that President Xi is determined to refocus the economy for the benefit of ordinary people – hence his attack on corruption and his determination to solve the pollution problem.
An important new statement this month from China’s policy-making Central Economic Work Conference highlights the critical elements of the country’s move to this New Normal:
We must understand the new normal, adjust to the new normal, and develop under the new normal
- Coming to terms with the new normal will be the “main logic” for economic growth for some time
- Chinese economy has entered the new normal, featuring a shift from high speed growth to a medium-to-high one
- The focus of economic growth will be shifting from quantity and speed to quality and efficiency
- Economic momentum is increasingly driven by new engines rather than old ones
- The new normal has not changed the strategic importance of a period that will see great achievements, nor the fundamentals of the Chinese economy”
Anyone who imagines there will be a return to any kind of ‘business as usual’ policy is fooling themselves, as I argued in the Financial Times’ BeyondBrics blog in October.
The crucial point is that it means markets are now returning to being governed by the fundamentals of supply and demand, not by artificial policymaker stimulus. I describe this as the Great Unwinding, and set out its expected direction in a series of posts beginning on 18 August. These correctly forecast the collapse of oil prices to “$70/bbl, and probably lower“, as well as the ”strong move upwards“ by the US$. The posts in the series were as follows:
- August 18: The Great Unwinding of policymaker stimulus has begun
- August 27: Oil prices break out of their triangle – downwards
- September 3: US dollar rises as investors worry low-cost money may disappear
- September 10: Great Unwinding of policymaker stimulus creates interest rate risk
Since then, we have launched our new subscription service, The pH Report. This aims to provide an informed and independent guide through the volatile and uncertain world now emerging. I hope you might consider subscribing.
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