Can China's stimulus plan boost global growth?

News that China is poised to loosen its self-imposed restrictions on debt has created some buzz in the investment community. The excitement is understandable: History suggests that the global economy typically benefits whenever China turns to credit creation to boost growth. Is there any reason to believe this time could be different?

Aggregate financing, a broad measure of credit, in China came in significantly above expectations in June, boosted by a recovery in bank lending and record government bond sales. This lends credence to media reports that China could grant local governments special permission to issue US$220 billion in special bonds in the second half of the year. If true, this would give the Chinese economy a shot in the arm and, as past experiences suggest, bolster global growth along the way.

As appealing as the narrative seems, we think it would be prudent to expect a different outcome in this instance.

Even though China’s credit impulse bottomed out in October 2021 (and had been rising since), we believe it would be wrong to mechanically extrapolate that to stronger global demand/growth. That’s because China’s growth model—especially since 2018—has been focused on two key principles:

  • Self sufficiency
  • Growing net exports at a faster pace than net imports

As a result of its policy focus, China began importing net demand from the rest of the world as opposed to exporting net demand to the rest of the world. As it turns out, China’s annual demand impulse has grown increasingly negative in the past few months. At the risk of sounding repetitive, it’s worth noting that global growth prospects haven’t exactly brightened despite the improvement in China’s credit impulse since last October.

Demand impulse: U.S. trend dominates
Component chart showing the combined total of U.S. demand impulse and China demand impulse from 2006 to data available as of July 12, 2022. The data shows that since 2022, the United States' demand impulse has been deteriorating, and that has brought the combined demand impulse from both economies into negative territory despite increases in China's demand impulse.

Source: General Administration of Customs (China), China Customs Statistics, National Bureau of Statistics of China, U.S. Federal Reserve, U.S. Census Bureau, Macrobond, Manulife Investment Management, as of July 12, 2022.

The other development that’s taken on more significance as we head into the second half of the year is that the United States’ demand impulse has been stuck in negative territory since November 2021. It’s difficult not to interpret this as anything but an ominous signal since the United States is the net marginal consumer as well as the net marginal provider of financial capital to the world; in other words, it’s the world’s most important source of marginal global demand impulse. To put things into perspective, when the U.S. demand impulse fell into negative territory, it set off a downgrade cycle to global growth expectations. 

Global growth forecasts began heading lower after U.S. demand impulse turned negative, YoY (%)
Chart how consensus growth forecasts for emerging-market economies, China, the United States and Eurozone economies has evolved since January 2019 to data available as of July 13, 2022. The chart shows that consensus forecasts for these economies started heading lower after November 2021, when U.S. demand impulse turned negative.

Source: Bloomberg, Macrobond, Manulife Investment Management, as of July 13, 2022. YoY refers to year over year.

In recent weeks, investors have been focused on a string of downward revisions to U.S. growth forecasts from noted economists and global institutions such as the World Bank. The International Monetary Fund has also indicated that it will downgrade its global growth forecast substantially in the coming weeks. We’ve arrived at a point where expectations for U.S. GDP differentials have narrowed. This may partly reflect expectations of FIFO (first in, first out) of recession, but that would be misplaced. We’ve also revised our forecasts recently to incorporate a U.S. recession early next year. If that were to materialize, it’ll no doubt amplify recessionary dynamics in Europe and China.

The United States is a key export market for European economies while also an important export destination—along with Europe—for Chinese goods. This is the reality of a globally synchronized economy. We might have embarked on the journey to deglobalization, but we’re not that far into the journey to be immune. As such, where global growth is concerned, things are likely to get worse before they can get better.

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Sue Trinh

Sue Trinh, 

Head of Macro Strategy, Asia, Multi-Asset Solutions Team

Manulife Investment Management

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