Talking Point  

Chinese credit stimulus to boost global economy

Chinese credit stimulus to boost global economy

The global economy is set to improve due to an increased credit stimulus programme by China in response to growing US-Sino trade tensions, industry participants said. 

This comes as China’s “credit impulse”- a measure of the change in new credit issued as a percentage of GDP- has been increasing. 

China, the world’s largest economy, is cutting reserve requirements, incentivising lending and extending credit in some parts of the economy to respond to growing trade tensions between China and the US. 

Some of China's policies to counter the trade threat include issuing higher than expected monthly loans of 3.3trn yuan ($0.49trn) instead of 3.3trn in January 2019.  

This marked the highest amount of monthly loans issued since 1992. 

Amo Lawrenz, global investment strategist at Ashburton Investments, said: “Now with Chinese authorities reversing tightening efforts, the impulse is trending back up." 

He added: “It [China’s credit impulse] is considered a key driver of economic and investment growth in China, as well as a significant indicator for the global economy. Its fluctuations are correlated to – and often precede – economic changes in global markets.”

Mihir Kapadia, chief executive of Sun Global Investments, said: “A boost to China’s credit will have an impact on the global economy  as the credit injection will no doubt support the economy, which is currently unnerved by the global macroeconomic fears such as the slowdown in the economy and the trade war with the US."

Trade tensions between US and China, the two largest economies have been bubbling since last year. The latest round of talks concluded at the beginning of May, with signs the countries were reaching closer to a final deal. 

But Ricky Chan, director and chartered financial planner at IFS Wealth and Pensions, warns that a higher credit impulse will not necessarily translate into a bullish outlook. 

He said: “You would expect higher credit to feed through to helping companies to expand its operations, hire more staff, which naturally feeds through to improve the overall economy (so higher tax receipts for the government too).

"But it also means businesses would be higher leveraged on loans which could be risky when things take a turn for the worse.”

Mr Kapadia said advisers should continue to keep a good allocation in global risk assets, particularly in emerging markets. 

He added that while there may be limited upside to Chinese stocks given that they outperformed most markets in 2019, the decision to extend credit will still be supportive of all global risk assets.