GROWING fears of a slowdown in China may have, for
the time being, been allayed by the country’s recently announced new
slew of measures to stimulate its economy. But concerns of deep-seated
structural problems coming back to haunt the world’s second-largest
economy at a later stage remain.
A recent report by China’s Development Research Centre points that
the country’s economy has become “unstable and uncertain like never
before”.
State researcher
Yu Bin
was quoted by the foreign media as saying that the “downward pressure”
faced by the Chinese economy had been larger than expected.
“Market expectations are unstable, downward pressure has increased,
and existing and new structural mismatches exist,” Yu notes.
“Growth inertia should not be underestimated as new growth engines and patterns have not been formed,” he adds.
Major indicators have confirmed that China is bound for slower growth.
For instance, a preliminary survey of purchasing managers released
over the week by HSBC Holdings Plc and Markit Economics show that
China’s manufacturing sector in July has contracted further, with
readings for the purchasing managers index (PMI) remaining below 50, the
demarcation line between expansion and contraction.
Preliminary reading shows that China’s PMI for July has fallen to an
11-month low at 47.7. This is below the consensus forecast of 48.5, and
has been taken as an indication that the worst of China’s slowdown has
yet to be reached.
A slowing Chinese economy has a wide implication on the world’s gross domestic product (GDP).
The sheer size of China’s economy – with its GDP expected to reach
US$9 trillion (RM28.8 trillion) by year-end – speaks of its
significance. It is the second-largest and currently accounts for about
10% of global economy.
The past few years have also seen China’s trade and connectivity
with the rest of the world, especially Asia, growing substantially.
Hence, the state of China’s economy could affect the rest through
various transmission channels, such as exports, commodity prices and
financial markets.
In a simulation exercise to assess the effects of China’s economic
slowdown on global growth, Japanese investment bank Nomura Research
found that a one percentage point drop in China’s GDP would lower global
growth outside the country by 0.3 percentage point, but with a wide
variation among economies.
The hardest hit economies, Nomura argues in its report, would be in
Asia, with growth falling by one percentage point or more in Hong Kong,
Singapore and Taiwan.
The impact, it adds, is also large on commodity-producing countries,
such as Australia, Malaysia and those in Latin America. Despite being
located much further away from China, the impact on GDP in Latin America
is as large as that of Asia, it says.
In general, emerging-market economies will be among those hardest hit,
Rob Subbaraman, Nomura’s chief economist and head of global markets research for Asia ex-Japan, says in a media conference call.
He points out that the slowing down of emerging-market economies as a
result of China’s slowdown will pose a second-round effect global
growth.
“If you think arithmetically what is driving global growth now, it
is not Europe… the US to an extent (and) Japan to an extent, but by far,
the biggest driver of global growth is emerging-market economies. This
would have an effect on global growth,” Subbaraman says.
Malaysia is one of the countries highly vulnerable to a China slowdown.
For one thing, China is Malaysia’s major export destination,
accounting for about 13% of the latter’s total exports last year.
Malaysia’s trade balances will also be affected negatively from falling
global commodity prices and lower external demand given the knock-on
impact globally of slower Chinese growth.
Slower growth
China’s economy, or GDP, grew 7.5% during the second quarter of this
year, after growing 7.7% in the first quarter. It was the slowest
growth in three quarters.
The country’s target is for its economy to grow 7.5% in 2013. That would be the lowest growth rate since 1990.
China’s government has recently stated it would not tolerate any GDP
growth of below 7% as that is viewed as the minimum rate for it to
achieve “a moderately prosperous society by 2020”.
In a move seen widely to protect its growth target for 2013, China
unveiled a “mini stimulus” over the week to boost its sluggish economy.
The measures include a plan to eliminate taxes on small businesses,
cut costs for exporters and speed up construction of railway plans. It
remains to be seen whether there will be more measures in the pipeline
to boost the country’s slowing growth.
Several investment banks have already downgraded their outlook for
China, with many expecting the country to miss its growth target of 7.5%
this year.
Among these are Citigroup, which has cut its estimate to 7.4% from
7.6% for 2013, and to 7.1% from 7.3% in 2014; as well as HSBC, which has
cut its 2013 forecast to 7.4% from 8.2%; and to 7.4% from 8.4% for
2014.
According to French investment bank Societe Generale, a hard landing
in China, while an extreme view, is no longer a “non-negligible” risk.
It argues that there are two major events that could trigger a hard
landing in China, which it classifies as GDP growth falling below 6%,
the minimum level required to keep the country’s job market stable and
avoid systemic financial risk.
These events include trade shocks, which could lead to a sharp
deterioration in exports and loss of jobs; and insufficient public
investment or an intended deleveraging going out of control.
Nomura, which has recently cut its forecast for China’s 2014 GDP to
6.9% from 7.5%, believes there is now a 10%-20% chance for China’s
economic growth to fall below 6% next year, as the country faces stress
from many dimensions, including financial leverage, pollution and social
tensions.
Nomura argues that there are both cyclical and structural factors contributing to China’s slowdown.
According to Nomura, China’s potential growth structurally is on a
downtrend due to a dwindling labour force and a lack of reform, while
cyclically, the monetary policy stance has changed from its loose bias
in the second half of 2012 to a tightening bias since the second quarter
of this year.
“Given the high level of leverage in the economy, policy tightening
may lead to a faster deleveraging process, higher interest rates and a
credit crunch, all of which would combine to cause a sharp slowdown in
economic growth,” it says.
By CECILIA KOK The Star/Asia News Network
When China Sneezes, Everyone Gets Sick
Not too long ago, the story was that when Chinese
buy an ounce more of rice and eat more chicken, commodities prices would
rise. And indeed they did. But now the story is, if China sneezes, we
all get the flu.
The Chinese economy is sick. Not deadly sick, but in a funk.
It’s not that the funk will put the U.S. or Brazil in negative
growth, but it will in Europe. Indeed, if China does see growth in the
hard landing territory of under 6%, every economy in the world will see
their GDP fall. Asia will be hardest hit. The Eurozone, already flat,
will go downhill.
“The likelihood of China experiencing this risk scenario is a
non-trivial 10-20%,” said Rob Subbaraman, Nomura’s Chief Economist and
Head of Global
Markets Research, Asia ex-Japan.
In Nomura’s baseline scenario, China’s GDP growth slows to 6.7% in
the first half of 2014 and recovers slightly in the second half,
bringing next year’s GDP forecast to 6.9%, China’s slowest since 2008.
Both cyclical and structural factors contribute to this slowdown.
Structurally, China’s potential growth is on a downtrend due to a
dwindling and aging labor force and a lack of reform. The government
still runs the national and local economies, making China slow and not
very dynamic.
The current deleveraging process in China, which follows such a
profound period of credit growth, is likely to last well into 2014.
There will be less money to go around in the world’s No. 2 economy. In a
higher risk scenario, GDP growth slows to 5.9% for full-year 2014 and
to 5% in the first half of next year. If that doesn’t make the hard
landing callers seem prescient, then I don’t know what does other than a
bankruptcy of a major Chinese lender.
Not that bankruptcies are out of the question.
Earlier this year, China faced its first ever default on a $531
million loan by Suntech Power Holdings, one of the largest solar power
companies in the world. Suntech power shares are now trading under $2,
down 95.6% in five years.
There area few key sectors of the economy that need to downsize.
After building up so much in the past as states looked to create their
own industries and help with full employment, companies in the
automotive and solar power space will be particularly hard hit.
And while some will be absorbed by larger players, it is probable
that many will just fold due to lack of demand. Workers will be
unemployed. China doesn’t have the safety net we have in the United
States. If this gets out of hand, there is a chance for social unrest.
“We have considered a range of stresses which the economy faces from
many dimensions, including financial leverage, pollution and social
tensions,” said Subbaraman.
The Side Effects
“We find that stocks in the mining and energy-intensive U.K., Latin
America and emerging Europe, Middle East and Africa exhibit the MSCI
World’s highest — and in this scenario, adverse — correlations with
China H-shares,” said Michael Kurtz, Nomura’s Global Head of Equity
Strategy and Chief Asia ex-Japan Strategist. H-shares are priced in Hong
Kong dollars.
Kurtz said that from a top down approach, Japan offers the world’s
lowest equity correlation with China H-shares, along with key
fundamental firebreaks that make Japan an attractive “defensive” equity
market in a China slowdown scenario.
For global currencies, a sharp slowdown in China’s economy would have
both direct and indirect negative impacts on commodity producers and
countries with relatively large China trade links, mainly Australia,
Canada, Brazil and Korea.
The hard landing scenario of less than 6% growth is not Nomura’s
baseline case because they think the government can take action to
smooth out the deleveraging process and growth slowdown to avoid a
financial sector meltdown. The banking sector is totally under the
government’s control.
In a 58 page report to clients released by Nomura this week, analysts
said they did not think Beijing will allow banks to fail. So the
transmission of corporate default may not be amplified through bank
failure. This is the key difference between financial risks in China and
those we have seen unwind in market economies.
The indirect impact of a sharp investment-led China downturn, via a
slump in commodity prices, stands to be substantial for some countries
like Brazil. China is Brazil’s biggest trading partner. Brazil’s
primary exports there are soy and iron ore, so any slowdown will be
particularly bad for miners like
Vale VALE -0.42%.
Vale shares this year are down 31.7%, worse than the Bovespa Index’s other major large cap,
Petrobras PBR -0.41%, which is down by 26.03%.
China’s per capita imports for metals now rivals that of advanced economies, according to the
International
Monetary Fund. It accounts for some 30% of the world’s total imports
of metals and a full 65% of total iron ore imports globally. In energy,
China’s share of world imports is in the high single digits, while for
food it is low single digits, with the substantial exception
of soybeans, which is over 50%.
The IMF has estimated that a one percentage point fall in China’s GDP
growth can result in price declines of 6% for oil and base metals.
Here’s what a decline will do for countries around the world. For areas already struggling, it means recession.
Achoooo!!!
Real GDP growth in 2014 under Nomura’s base case and China risk scenario.
China Base Case 6.9% China Risk 5.9% Difference (pp) -1%
Global Ex-China 2.5% 2.2% -0.3%
Asia 4.1% 3.6% -0.5%
United States 2.6% 2.4% -0.2%
Eurozone 0.0% -0.3% -0.3%
Japan 2.5% 2.0% -0.5%
Brazil 1.8% 1.3% -0.5%
India 5.5% 5.2% -0.3%
Aggregates are calculated using purchasing power parity (PPP) adjusted shares of world GDP.
Source: Nomura Global Economics.
China's Favorite U.S. States In 2012
1 of 12
AP
+ show more
Best Frenemies Forever
Who would have known it? China is buying Made in the U.S.A.
Many sectors and states from across the country are selling more to
China these days. In fact, between 2003 and 2012 total exports to China
rose 294%, an increase of nearly $81 billion. Forty-two states have
achieved triple-digit export growth to China since 2003, and four states
experienced quadruple-digit growth over the same period – Alabama,
Nevada, South Carolina, and Vermont. Last year, American exports to
China came from a broad range of American sectors, including crop
production, transportation equipment, electronics, chemicals, and
machinery. All told, the Chinese bought $109 billion in 2012, an
increase (again) of 6.5%
By Forbes .
Kenneth Rapoza, Contributor
