Pedestrians walk past the Bund Bull statue as skyscrapers of the Pudong Lujiazui Financial District stand across the Huangpu River in Shanghai. Picture: Bloomberg/Qilai Shen
Pedestrians walk past the Bund Bull statue as skyscrapers of the Pudong Lujiazui Financial District stand across the Huangpu River in Shanghai. Picture: Bloomberg/Qilai Shen

For close to two decades, China has pulled global growth upwards. Though still growing fast, the rate of growth of the world’s second-largest economy is now declining, and that is pulling aggregate global growth downwards, quietly upending a myriad business and trade patterns.

China now looms so large in the global economy that when it sneezes, others catch a cold. Corrected for currency fluctuations, the Chinese economy is the same size as those of India, Germany, Japan and Russia combined. But China’s annual growth has dropped steadily, from 10.6% in 2008 to 6.6% in 2018, and it is now declining faster than expected.

This means the growth gap between China and the average of developing economies around the world is lower than two percentage points for the first time in almost 50 years, according to IMF figures.

The most obvious change is in the country’s trade surplus with the rest of the world, which has plummeted to a fraction of its former glory. This is partly a matter of deliberate policy, as Chinese authorities have encouraged citizens to spend more at home to hold the growth rate up.

As Chinese spending has increased, the country’s savings rate has declined, and that will have huge implications for debt markets. Internationally, China has been a huge buyer of foreign assets such as US treasuries, but that flow is now reversing.

It’s not only the decline that’s a problem; the surprising rate of the decline is providing Chinese policymakers with terrible headaches. According to the Bank of International Settlements, the level of credit in Chinese nonfinancial business is now about 155%, compared with the G20 average of about half that. For fast-growing businesses, it is entirely rational to borrow heavily, but at some point borrowing more to increase production hits a ceiling, so Chinese authorities are now encouraging "deleveraging".

That impulse would normally require interest rate increases, but to maintain overall growth rates, the People’s Bank of China has instead kicked off 2019 by cutting the reserve requirement ratio (RRR).

Standard Bank analyst Jeremy Stevens says in a note to clients that, true to form, markets rallied in response — especially infrastructure-related stocks — as cutting the "RRR is seen as a sign that Beijing is preparing to go back to the old playbook".

He adds: "Beijing expects 2019 to be a difficult year. Domestic sentiment is weak, and news flow is likely to deteriorate further."