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Chart of the week: The China syndrome is not yet a growth meltdown

23 January 2018

Bob Cunneen, Senior Economist and Portfolio Specialist


China's economic growth vs financial conditions

Source: Datastream.


China’s annual economic growth has slowed to 6.4% in the final quarter of 2018 (blue line). For some commentators, China appears on the edge of a growth meltdown.

Yet China’s economic growth has been progressively slowing since 2011 when growth was running at a 12% annual pace. China has primarily engineered this slowdown given concerns that robust growth was generating excessive financial risks. From 2011 to 2015, China materially tightened financial conditions (red line) by raising lending interest rates and commercial bank’s reserve requirements ratio. Since 2016, financial conditions have moved from tight towards more neutral settings, thereby providing less of a constraint on economic growth.

Over recent months, there are signs that China’s policymakers are more concerned about the future downside risks to China’s growth. Trade tension with the United States is a major worry. China is now responding to this risk with more stimulus measures. China’s central bank has cut the required reserve ratios and has pumped cash into the financial system. This has seen interbank interest rates fall and banks’ lending growth stabilise at a strong 12.8% annual pace. This move to easier financial conditions should help stabilise China’s growth performance and mitigate the risk of a sudden growth meltdown.


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