1) China's economic growth is slowing considerably, with the risk of a "hard landing" increased. GDP growth is projected to be just below 8% this year with moderate stimulus to counter the slowdown.
2) A hard landing in China's economy could have significant negative effects on the global economy as China accounts for around 50% of global growth. It would also impact financial, commodity, and trade markets.
3) Slower growth in China would negatively affect exporting countries and commodity prices, with countries like Germany, Japan, Sweden, the US, Australia, Indonesia, and Brazil feeling the effects. It could also cause turbulence in global financial markets.
1. To the Point
Discussion on the economy, by the Chief Economist August 31, 2012
China – a potential watershed for global growth
Economic activity in China is slowing considerably, and the risk for a hard
landing has increased. Our main scenario is GDP growth of just below 8 % this
year, and a moderate amount of stimulus to counteract the slowdown.
The effects on the global economy if China’s economy landed harder should not
be underestimated as China alone accounts for 50% of global growth. Financial
and commodity markets would also be affected, as would geopolitical and trade
relations.
Cecilia Hermansson Slowdown means firing up the investment engine again
Group Chief Economist
Economic Research Department Much has been written about the financial and institutional crisis in the euro area and
+46-8-5859 7720 the risk that US would “fall off the fiscal cliff” if, after the presidential election,
cecilia.hermansson@swedbank.se Congress could not make up its mind on next year’s budget. Yes, these two factors
represent very large threats to the world economy. Equally important, however, is the
Chinese economy since, if it were to land hard and lack proper management going
forward, the global economic climate would look so much chillier.
There are important questions to be raised at this point: How much is China slowing
down? How much stimulus can we expect to come from monetary and fiscal policy?
Will the Chinese authorities stick to the plan to rebalance economic growth from
investments/exports to household consumption?
China’s slowdown has accelerated lately. The second quarter saw GDP growth of
7.6%, which means relatively slow quarterly growth of below 2%. Other signs of
slowdown include the levelling off of electricity production, the weak signals from
purchasing managers, smaller inflows of foreign direct investment, and decreased
demand for commodities in the global market. Developers’ unsold property has now
reached 3 million units, compared with 2 million units in 2008, and the growth rate of
real estate construction is falling close to the historical lows seen in 2009.
Another sign of slowdown is the export growth of only 1% in June, and the
authorities’ reluctance to let the renminbi appreciate further against the US dollar (it
is still rising against the euro). Between May 2010 and December 2011, the renminbi
appreciated by almost 8% against the dollar in nominal terms (and more in real
terms), but thereafter it has depreciated by about 1%. This policy protects exports.
It is hard to estimate the amount of stimulus that can be expected from the Chinese
authorities to counteract the slowdown. The stimulus programmes in 2008-2009
accounted for 13% of GDP during those two years, but it is unlikely that the stimulus
can be as large this time. The People’s Bank of China (PBC) has cut the lending rates
a couple of times, but these are still at higher levels than were seen in 2008-2009.
Reserve requirements have been lowered for small and large banks, and credit growth
is again picking up – although we hope not to the rates seen after the last crisis, which
resulted in overheating. In addition, open market operations have led to injections of
liquidity into the monetary system. All in all, the PBC will do more to make monetary
policy more expansionary, including lowering the reserve requirements further.
On the fiscal side, the authorities cautious about relaxing control measures on the
property sector since the risks of overheating in that sector could increase again.
Prime Minister Wen Jiabao wants to “stabilise growth, including promoting
consumption and diversifying exports, but currently the main task is to promote
reasonable investment growth” (see the July 17th The Financial Times). This means
that the authorities are ready to fire up the investment engine again even if the
investment ratio to GDP is already 49%. If the local governments’ pledges for
stimulus can be believed, then the measures look bigger than in 2008-2009, however,
No. 8 it is unlikely that all of these pledges will be realised since funding at the local level is
lacking. The process of rebalancing would be postponed if growth were to falter. Still,
2012 08 31 the rebalancing will take many years and has to be based on reforms of social security
and pensions, so that people will dare to lower savings and increase spending.
2. To the Point (continued)
August 31, 2012
How will China’s slowdown affect the rest of the world?
Chart 1: Credit growth, reserve
requirements in small and large banks, and Since about half of global growth comes from China alone, the effects on the world
lending and deposit interest rates in China economy from a Chinese hard landing would be substantial. Slower demand would
affect not least exporting countries like Germany, Japan and Sweden, but also the US,
30 where foreign trade has become more important for growth after the financial crisis.
25
Another dimension is the effect on commodity prices. Steel prices have already
Credit Growth/M2 fallen, and we see other commodity prices also being affected. For a deeper
20 discussion on commodity prices, read the July Swedbank letter on “Energy and
Commodities”. The countries most dependent on Chinese demand for commodities
Percent
15 are Australia, Indonesia, and Brazil.
10 Reserve requirements in small
and in A third effect would be financial markets’ response to the slowdown. There are
large
banks banks expectations (and hope) that China will be able to withstand a hard landing, so that at
5
least the global economy can continue its slow jog forward, despite the US’s creeping
Lending rate 6 months
and the euro area’s shift into reverse. However, with China growing more slowly,
Deposit rate 6 months
0 equity markets, especially, would become depressed. A Chinese hard landing, in
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
combination with fiscal cliff concerns in the US and a deeper crisis in the euro area
Source: Reuters EcoWin
Source: Ecowin would be particularly turbulent.
A fourth effect of a Chinese slowdown would be on its relations with other countries.
China has stopped the appreciation of the renminbi against the US dollar and instead
allowed it to depreciate; this has given an opening for the US Congress to
Chart 2: House price development in characterize China’s exchange rate policy as manipulative. Not least, presidential
Beijing (l.h.s) and the Shanghai Stock candidate Mitt Romney has threatened to pursue this issue if elected. This could help
Exchange (r.h.s) build up pressures for trade protectionism, not only between these two countries, but
25,0 13000 also between China and Europe, Japan, and emerging markets.
Shanghai <-- House price
22,5 stock growth Beijing 12000
exchange,
A fifth effect concerns the power shift this fall, as several members of the Politburo
20,0 180 index--> 11000 will be replaced. Moreover, in March next year Xi Jinping and Li Keqiang are
17,5 10000 expected to succeed Hu Jintao and Wen Jiabao as President and Prime Minister. If
15,0 9000 China’s growth is slowing more than expected, there are risks to political stability,
and it may also be more difficult to reach a consensus on the needed policy measures.
Percent
12,5 8000
Index
10,0 7000 Political instability could not only have severe effects on economic and social
7,5 6000
conditions for the population, but also have a large impact on foreign direct
5,0 5000
investment, especially on international firms already located in China.
2,5 4000 From a longer perspective, a slowdown and a attendant need to stimulate the
0,0 3000 economy could mean that the rebalancing process is postponed and that the risks for
-2,5 2000 overheating increase, thus leading to a hard landing in a few years’ time, with much
05 06 07 08 09 10 11 12 bigger consequences for the world economy. This would be particularly difficult if
Source: Reuters EcoWin
China were to liberalise the financial sector in the meantime, and the contagion from
Source: Ecowin
bursting bubbles in the financial and real estate sectors would be more widespread. In
such a situation, the process of liberalisation could be reversed, thus leading to new
regulations in various sectors.
Our main scenario is that China’s GDP will grow by just under 8 % this year, before
reaching 7.8% next year and 7.6% in 2014. This includes the authorities taking a
cautious approach to stimulus, in order to avoid a new real estate boom and
overheating. This scenario – although projecting slower growth than we have seen in
the past – is a positive scenario for China in which the economy is landing softly, the
policy response is moderate, and the rebalancing towards private consumption
continues slowly. It remains to be seen if the scenario is not only positive, but also
optimistic. As always, it is good to hope for the best and be prepared for the worst.
Not least does this apply to China at this point.
Cecilia Hermansson
Economic Research Department To the Point is published as a service to our customers. We believe that we have used reliable sources
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Cecilia Hermansson
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