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If China sneezes
Publication Date : 27-07-2013
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 by year-end – speaks of its significance. It is the second-largest and currently accounts for about 10 percent 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 percent 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.
China’s economy, or GDP, grew 7.5 percent during the second quarter of this year, after growing 7.7 percent in the first quarter. It was the slowest growth in three quarters.
The country’s target is for its economy to grow 7.5 percent 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 percent 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 percent this year.
Among these are Citigroup, which has cut its estimate to 7.4 percent from 7.6 percent for 2013, and to 7.1 percent from 7.3 percent in 2014; as well as HSBC, which has cut its 2013 forecast to 7.4 percent from 8.2 percent; and to 7.4 percent from 8.4 percent 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 percent, 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 percent from 7.5 percent, believes there is now a 10-20 percent 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.