By John Richardson
THE above chart indicates that the reformers have regained influence in China:
- Whilst new loans from state-owned banks in May beat analysts’ expectations by a big distance, total social financing (TSF), which is the measure of all forms of new lending, was substantially down compared with the previous month.
- The reason for lower TSF was that shadow lending was $49bn lower in May than in April. Shadow lending is financing via the highly speculative private lenders.
In Q1 of this year, the anti-reformers gained the upper hand because TSF increased by as much as 58%. This was largely driven by a resurgence in shadow lending,
Local governments were amongst the anti-reformers who gained the upper hand. They oppose reforms because of the way they are required to finance themselves.
There was also some evidence that the anti-reformers at the central government level gained greater influence. These are the Populists who prefer to shore-up short-term growth at the expense of what I believe are essential long term reforms.
This latest fall in TSF leads us to these the two very important conclusions:
- Short term increases and declines in TSF remain a vital tool in assessing the immediate outlook for oil and other commodity markets.
- The Q1 success of the anti-reformers reminds us that there are no guarantees that reforms will ultimately be successful.
Conclusion No1 then tells us that if the reformers remain in control over the next few months, a lot more of today’s froth will be taken out of oil and other commodity markets.
The opposite might obviously happen. But it is worth noting that since January 2014, the reformers have on the whole been in charge. Their heavy influence helps to explain the September 2014 collapse in oil prices.
Conclusion No2 means that you must build a scenario where reforms fail. What would China look like in ten years’ time if it fails to escape the middle income trap? A country where per capita income growth hits a ceiling?
I believe that this incredibly bleak scenario won’t happen because of the strength and vision of China’s current political leadership. But any chemicals company that fails to plan for this worst-case outcome would be exposing their employers and shareholders to unacceptable risks.