Chinese economy now structurally and cyclically weaker than in 2015 - Natixis

HONG KONG - China's worsening cyclical condition calls for a stimulus package which could buffer its structural slowdown. This will imply additional borrowing and, thus, more leverage and lower potential growth down the road, Nataxis, the French banking group, says in a new research note.

Nataxis says that, given the complicated geopolitical situation, especially when the impact from the US' containment gradually materialises, it seems not feasible for China to sacrifice its short term growth target.

"Thus, the poor domestic and external sentiment needs to be reverted to avoid the downward spiral," the note says.

Nataxis says the current slowdown in China started at the end of 2017 and accelerated recently amid tension with the US-led trade war. "It is only two years after the previous sharp deceleration (from 2014 to 2015) against the backdrop of a stock market collapse and massive capital outflows from China," it says..

Nataxis says it has looked into structural and cyclical factors driving the slowdown today and that of 2015, and concluded that the structural slowdown is even more acute today. "Our concern is that the cyclical slowdown is now deeper, which calls for demand supportive policies (even at the cost of higher leverage down the road).

"Focussing on key structural issues of the current slowdown versus that of 2015, the situation has only deteriorated further." Natis points to -

    Continued slowdown in potential growth rate with lower labour productivity

    Population aging continued to worsen since 2015
    Higher household and private corporate leverage weighing on consumption

It says that, in the same vein, cyclical factors behind the slowdown are worse today than in 2015 except for the extent of deflationary pressures, as follows -      

    Higher producer prices still supporting Chinese firms' profits, but already declining
    Clampdown on shadow banking, thereby restricting credit to real estate sector and local government financial vehicles, with inadequate substitution from loans

Infrastructure investment declined substantially and even much quicker than the general  investment, partially related to the anticorruption campaign.

www.natixis.com (ATI).