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As we head further into the second half of 2012, it is clear that policy from central banks in the US, Europe, and China will drive markets and the global economy. Monetary policy in the US is becoming less impactful, while central bankers in Europe appear unwilling to tackle the enormity of their collective problem. It could be China that provides a sparkplug for second half global growth, but if Chinese officials prove unable to stem weakening growth, we could face an assault on growth from more fronts than previously anticipated.
In the latest week, investors received unfavorable news about the Chinese economy in the form of disappointing new loan growth and exports.
In July, year-over-year export growth fell to 1% from 11.3% in June. It should be no surprise that Europe is the biggest culprit behind China’s export weakness. Exports to Europe fell more than 16% last month. Europe is not the only trouble spot for China, though. Exports to the US fell to a 0.6% increase from more than 10% in June.
Internally, the situation does not appear much better. Chinese banks originated 540.1 billion yuan of new loans in July, well below Bloomberg survey estimates for 700 billion yuan. According to Bloomberg, July was the weakest month for loan growth since September 2011.
Economists are increasingly fearful that the recent string of economic misses is setting the table for a disappointing second half of the year in China. Chinese officials have uncharacteristically admitted that it will be difficult to reach certain growth targets.
One factor working in favor of Chinese officials is the recent deceleration in inflation. Consumer prices were higher by 1.8% in July from the prior year and down dramatically from the peak of 6.5% in mid-2011. This opens the door for new monetary easing measures in the Far East. Officials already cut interest rates this year and reduced the reserve requirement ratio for banks.
Equity markets in China doubt the possibility that government officials can dig out of the current hole. The Shanghai Composite index continues to plumb new lows, despite a rally in recent weeks.
With export growth to China’s major trading partners falling and banks cutting back on new lending, it appears that China is heading towards a difficult second half of the year. Chinese officials continue to have a number of tools at their disposal to combat weakening growth and the leadership transition taking place later this year makes it highly unlikely officials will want to start their new term on unstable footing.
Between Europe, the US, and China, it becomes ever more difficult to determine which is the tail and which is the dog.