China Center LEI Commentary: Slower LEI growth indicates the current rebound may be short-lived
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This China Center members-only report provides interpretive comments on The Conference Board Leading Economic Index® (LEI) and The Conference Board Coincident Economic Index® (CEI) for China.
The LEI for China rose 0.4 percent from the month before, down from the 1.1 percent increase seen in November. Real estate, consumer confidence, and new export orders all contributed negatively to the index, while credit extension and improving manufacturing conditions contributed positively. Overall, the slower growth in the index this month strengthens our expectation that the ongoing rebound in economic activity will be moderate.
- Credit continued to be the main driver of both economic and LEI growth in December. A relatively loose monetary policy stance, as manifested through directed lending and tacit support for non-bank credit channels, has spurred activity in local government infrastructure projects since the middle of last year.
- Throughout 2012, credit extension was the only consistent driver of LEI growth, adding a positive contribution to the index in each month of the year. However, as this note discusses in depth, underneath the headline lending numbers, financial distortions are evident. In particular, credit is increasingly becoming short-dated as bridge financing is extended to cover existing debts that cannot be repaid on time. This phenomenon raises concern about the effectiveness of the current credit expansion to continue promoting growth, versus simply funding legacy investments that are not yet economically viable.
- In addition, lending has now migrated outside the banking system to the extent that almost 50 percent of new financing in 2012 was not provided directly through bank loans. This dynamic dilutes the government’s regulatory capabilities and disguises the liabilities of the banking sector because formal lenders are interconnected with informal markets through various methods of securitization that are both complex and opaque.
- The signs of rebound in the manufacturing sector appear tentative at this point. It is unclear whether they relate to restocking against policy cues, or inventory build based on tangible order-book growth. Indeed, other major segments of the economy that would serve to drive manufacturing growth – exports, real estate and consumption – remain both weak and volatile. Therefore, we expect the current growth rebound to lose its momentum quite quickly with y-o-y growth slowing again in the second quarter, to bring full year real GDP expansion to 7.5 percent, down from 7.8 percent in 2012.