Caution on China Exposure As Credit Is Starting to Dry Up

china credit impulse 070517

When the RBA decided earlier this week to hold fire on gunning for a gradual rise in interest rate expectations, surely it was considering this: China credit impulse with a 9 month lead is taking a dive.

In other words, very recent mothers-to-be shall be giving birth to their children in a notably worse Chinese economy than when said children were conceived. How much worse? Perhaps four PMI points worse, which implies GDP growth falling by about 1-1.2% from the current annual growth rate of 6.9%. This doesn’t imply a market crash but it does imply that fewer Australian businesses need to boost investment.

We like leading indicators at Assist FX — both quantitative and qualitative. While the future is always uncertain, analyzing it as accurately as possible is best accomplished with forward looking indicators and models. What we are seeing on the horizon in China is a controlled, modest deleveraging with a minor tail risk of accelerated bankruptcies. As the facts change, so will our models. For now, we remain cautious on China-sensitive financial instruments such as the Australian dollar.