A recently weakened showing by the Chinese economy was likely a shorter- term trend on the back of tightened monetary policy by China’s central bank, as the economy transitioned from being investment-led to one driven by the services and household consumption sector.

Absa Private Client Asset Management head Craig Pheiffer said at a media briefing last week that, while the Shanghai Interbank Offered Rate “shot through the roof” in June as liquidity in the banking system was squeezed, this was an intentional move by the People’s Bank of China (PBoC) to curb a dramatic growth in credit extended by financial intermediaries.

“For a while, in China, it looked like the lead-up to the global financial crisis all over again. Overall, what we’ve seen is that the PBoC is quite prepared to take on the short-term pain to transition the economy, which is a process that will have its dark days,” he said.

Pheiffer cautioned that this might translate into upcoming financial quarter performances that bucked the growth trend previously observed in the Chinese economy.

“We might have a few quarters that don’t look that good at all, which may be quite shocking for the market. The country’s desire to get things right and deleverage the economy is going to come with a bit of pain, but we have a lot of confidence that the PBoC will manage that transition,” he commented.

Recent Chinese economic data had pointed to slower-than-expected growth, leading to Absa cutting its 2013 growth forecast for the country to 7.4% from its previous projection of 7.8%.

China’s shakier second-quarter performance was the result of the central bank’s squeeze on the “huge” growth in lending from the ‘shadow- banking industry’, or nonbank financial intermediaries.

Pheiffer noted that, apart from increased lending, intermediaries were using short-term funds to finance long-term deals, and were packaging funding deals into investment products boasting attractive terms.

“In a world that has recently lived through a subprime-induced financial and banking crisis, it wasn’t difficult for the PBoC to see how the story could quickly turn ugly. After turning the screws a bit, the PBoC did provide liquidity for the system, but it did come with warnings to correct lending behaviour and promote stability in the monetary environment,” he said.

However, Pheiffer noted that a brief tightening of the monetary system in an economy in which growth was slowing was disconcerting to global markets, and had resulted in a 14% drop in the Shanghai Stock Exchange Composite Index in June.

He added that, for the rest of the world, China’s “heavy-handedness” had raised questions about its growth potential, the level of its demand for commodities, and the impact of a slowing Chinese economy on global economies.

South Africa had already seen the impact of slowing Chinese growth, and this, coupled with recessionary conditions in Europe, had hurt South African exports and domestic manufacturing production in the second quarter.

“South Africa is not an island, and our cur- rent low rate of growth can partially be attrib-uted to the slow rate of growth in the global economy,” said Pheiffer.