I’ve never actually seen Groundhog Day — the 1993 film about
a Pittsburgh TV weatherman who finds
himself trapped reliving the same day over and over again
— but Bill Murray is a legend, and if you have to
opportunity use him to explain what’s going on in the global
economy, then you should.
So I will.
China’s economy has been stuck in its own Groundhog Day since
2015, and August’s weak economic data showed that we’re likely to
continue the loop into 2018.
Here’s what the loop looks like.
- In the beginning of the year, reeling from a year-end Federal
Reserve rate hike, the Chinese economy starts to falter. The
economists, politicians and intelligentsia at the
World Economic Forum in Davos all click their tongues in
dismay. Someone from the World Bank or the International
Monetary fund reminds everyone that the country is, yes, still
a massive debt bubble and yes, its banking system is still
churning out credit at a mind-bending rate.
And everyone completely freaks out.
- That freak out prompts the Chinese government to intervene.
Whether that means loosening up credit or shoring up the stock
market depends on the situation at hand. Going into 2017, for
problem was currency outflows.China does whatever it can to make it go away.
- The economy stabilizes for a few months, the intervention
subsides, and the economy starts to show signs of weakening
again. Then in December the Federal Reserve hikes rates again.
Nothing really changes — not the country’s debt position or
credit creation. And the loop resets.
This loop was set in 2015. That’s when, during a few terrifying
Chinese stock markets crashed twice and then in August,
the country devalued its currency, the yuan. The government
intervened, and the country sputtered through to the end of the
In December, the Fed hiked. In January 2016, the yuan started to
“It’s serious,” legendary investor George Soros told a
crowd in Davos that year, referring to China’s debt problem. “And
the Chinese left it too long to address the changeover in the
growth model that they have to adopt from — investment and
export-led to domestic-led. So a hard landing is practically
He wasn’t the only one worried, of course.
“I think the Chinese situation with the currency is very
important. Very important. If there is significant currency
weakness for the yuan that will mean more imported deflation and
it will make things more difficult,” said Ray Dalio, founder of
massive investment fund Bridgewater Associates during an
interview in Davos.
(We should note that Dalio likely believes the loop will
hold, as his firm is reportedly
raising money for a Chinese onshore fund.)
This 2016 panic was short lived. The Chinese government
stabilized the economy by turning on the credit spigots again.
And everything was great for a few months. Then not so
Then the Fed hiked rates in December 2016. Since the hike
was expected, money started leaving China toward the end of that
year. In December China experienced $82 billion worth of
outflows, the continuing a troubling trend that has been pushing
the value of the yuan, the country’s currency, down.
So when 2017 hit people were nervous, and – again —
the government intervened. Star China analyst Charlene Chu of
Autonomous Research wrote a note telling clients not to breathe
easy, though, and to watch out for the second half of the
Specifically, she said [emphasis ours]:
“China’s authorities have chosen to pursue harsher measures
against capital outflows over a large change in the exchange rate
to address the country’s outflow problem, at least for
now. This could work for a few
quarters, but we think closing the gates is not feasible over the
long run for the largest trading nation in the world with a
USD33trn banking sector. We expect
growth to begin decelerating in 2Q17, as a weaker credit impulse
passes through, but this is of secondary importance to outflows
and the currency.”
The government didn’t just intervene to stop outflows either. It
also made money easier, meaning debt concerns would have to take
a backseat for the moment.
“Everyone thinks the Q1 performance was done despite the
fact that credit tightening,” Lee Miller, founder of China Beige
Book, a private firm that collects Chinese economic data, told
Business Insider in an interview back in June. “What we actually
showed in our data… was that it was done because of some of the
loosest conditions we’ve seen.”
China’s August data showed that the deceleration Chu called for
has begun. Here’s the breakdown of the country’s main August data
points from Bloomberg Economist, Tom Orlik.
- Industrial output growth slumped to 6% year on year, down
from 6.4% in July and missing expectations of 6.6%.
- Production doesn’t appear to have picked up following the
weather and flooding related slowdown in July. A higher base for
comparison after growth accelerated in August last year was
likely one contributing factor.
- Retail sales slowed to 10.1% growth, down from 10.4% in July,
and below expectations of 10.5%.
- Fixed-asset investment slowed to 7.8% year on year in the
first eight months of 2017, down from 8.3% in the first seven
months and missing expectations of 8.2%.
- Real estate sales and new construction continued edging down,
slowing to 10.3% and 11.6%, respectively, in the first eight
months, from 11.5% and 11.9% in the first seven months.
Now, the Chinese government could look at this data and decide to
intervene again. There’s a big Chinese Communist Party meeting in
October that will determine leadership, and President Xi Jinping
may want things nice and stable then.
But of course, the market expects the Fed to hike rates again at
the end of the year. So then we’re back in Groundhog Day. We’re
back in loop.
“The way the rest of the world gets impacted by a big
China slowdown or a disorderly unwind of its debt
problems is through the currency,” Chu told Business Insider
last month. “A substantial weakening of the yuan would unleash a
wave of deflation globally.”
The question is what would do that? A strong dollar? A
trade war? A sudden (and unlikely) jump in inflation?
“If we start to get an inflation constraint in China
that would be a very new development,” Chu
said. “Inflation is not our base case, but it is worth
thinking about with a 57 trillion yuan in new credit in 2016-17e
and many commodity prices back on the rise. And it matters
because it says to the authorities that we cannot keep pulling
the credit lever as aggressively as we have in the past, and
then there will be serious questions about
When you think about that, Groundhog Day sounds amazing,