Slowing China poses dangers for emerging economies

Worlds’ second largest economy flags as policymakers manage cooling of debt-fuelled property market

 Shanghai, China: September saw a sharp fall in imports and a lower-than-expected decline in Chinese exports, as lower commodity prices and weaker domestic demand made themselves felt.  Photograph: Qilai Shen/Bloomberg

Shanghai, China: September saw a sharp fall in imports and a lower-than-expected decline in Chinese exports, as lower commodity prices and weaker domestic demand made themselves felt. Photograph: Qilai Shen/Bloomberg

 

China’s slowing economy presents a downside risk to various emerging economies in particular, but the negative effects should be less severe for most advanced economies, according to a new report from PricewaterhouseCoopers.

Domestic credit to the Chinese private sector is equivalent to just over 140 per cent of GDP, said PwC senior economist Richard Boxshall. So jitters in China, as the economy takes on a more important global role, are sure to trigger fears worldwide.

“China also has very high levels of local government debt,” said Boxshall, “and there are now concerns that a sharp slowdown could trigger another stage of the global financial crisis.

“By 2014, China’s investment to GDP ratio had increased to around 47 per cent, close to double the rest of the E7 average,” he said. “We expect the Chinese economy to grow by just under 7 per cent in 2015, but then to decelerate to around 5-6 per cent average annual growth in the medium-term, with most of the slowdown attributed to lower fixed investment activity and slower export growth.

“There may well be further cuts in the Chinese policy rate and to banks’ reserve requirement ratios to ease this slowdown,” he added.

An unscientific way to tell how the Chinese economy is doing is to look out the window of my apartment and see how many new cars drive by.

Fall in imports

Economists are divided on whether the long-anticipated turnaround has happened yet or not, although fears of a hard landing appear to be easing.

China’s economy is certainly not powering like it used to. Exports fell 3.7 per cent from the same period last year. This is less than the 6.3 per cent drop forecast by economists in a Reuters poll and moderating from a 5.5 per cent decline in August.

In yuan terms, exports fell 1.1 per cent year-on-year in September, while imports fell a hefty 17.7 per cent. In dollar terms, imports dropped 20.4 per cent from a year earlier to $145.2 billion (€127.5 billion), steeper than expected.

The past few months have seen China’s car sales suffer badly as slower growth impacts on auto purchases.

But recent data shows that Chinese consumers were more optimistic about the car purchasing environment in September, even though they were less likely to act on this assessment, according to the latest MNI China Auto Purchase Sentiment Report.

MNI points out that the VW scandal only came to light after their latest survey had ended. By type of car, sedans were still most favoured. However they continued to lose ground as SUVs held steady with the second highest share of responses. MPVs and minivans were the most improved as the third most popular choice.

Ford slightly down

However, passenger car sales were up 2 per cent in September, driven by steady demand for Ford sport utility vehicles. Sales of Ford’s Kuga, EcoSport, Edge and Explorer increased 13 per cent to 23,389 vehicles last month, with year- to-date sales increasing by 6 per cent over 2014.

The message appears to be that further discounting by car retailers, as well as a perception of better quality and choice, helped push the Car Purchase Expectations Indicator, which measures whether consumers think it is a good time to buy a car, 1.6 per cent higher to 101.8 in September.

This improved outlook, which consumers rated as the best in a year, was complemented by a 1.9 per cent fall in petrol price expectations, which hit their lowest in five months.

Sean Yokota, head of Asia Strategy at the Nordic bank SEB, says a hard landing for China is unlikely, but also feels a soft landing is going to hurt more than people realise.

“‘Soft landing’ sounds nice, like falling into a pile of feathers,” he said. “However, ask most people in China or anyone in the world going through a gradual slowdown and they will tell you it is not pleasant.”

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