According to the International Monetary Fund (IMF), China’s economic growth in 2017 is expected to be 6.7%, the same as 2016. China’s growth contributed 1.2% (or 39% of growth) to global growth of 3.1%, which makes the rest of the world very reliant on China’s continued strength.
As China’s contribution is key to global growth and continued recovery, China is easily the biggest wild card in the global economic outlook. Coronation discusses four key issues facing China in the second half of the year:
A slowdown in economic growth?
Over the last two years, there has been excessive borrowing in the private sector. The Chinese government is now encouraging financial regulators to curb banking and credit excesses, which have been fuelled by many fancy structured products, inter-bank lending and government borrowing. New regulations have resulted in a sharp drop off in credit extended. This is seeing a visible slowdown in new project starts and ongoing investment activity. Residential demand has started to slow and the property market is weakening. This will result in a steady reduction in steel, cement and other basic materials. Although they do not see a collapse of the economy, they do expect growth forecasts for the fourth quarter of 2017 to fall below 6%.
Fading support for global markets
At the end of 2016, Chinese commodity imports were up 20% making this the biggest recovery in history. This was driven by strong domestic property growth and an improvement in global manufacturing. However, a slowdown in Chinese new investments is reducing demand for commodities, which is negatively affecting the rest of the world and more so China’s Asian neighbours.
Renewed government support for lending
A slowdown in 2017, but will 2018 pick up?
The key lies in government relaxing lending policies. The government’s five yearly congress takes place in November and there is no doubt President Xi will remain in the post for a second five-year term. His main priority is for steady growth at a minimum of 6.5% per annum to achieve a doubling of real income during his tenure. This was the reason for the massive lending allowed, which had to be curtailed in 2017. However, if economic growth slows, as expected, Xi is likely to put pressure on banks and regulators to allow more lending to support growth.
No Financial Crisis …. (Yet)
China’s debt levels have soared in the last eight years and are near ‘developed’ market heights. Although this is a risk for an emerging market and, it’s unlikely China will escape this debt boom without pain, 2017 is not the year the financial system falls apart.
Although the financial market does become fragile, it’s not the debt level that buckles the system but rather the funding structures and here exposures are building more slowly.
China will eventually reach a crisis point as government continues to pump credit into the system to drive growth, but true systemic fragilities will only start to appear in three to four years’ time.
No need to panic, but be aware
Investors need to be aware of the risks associated with China. A collapse in the economy is not expected, but a gradual slowdown over time should take place.
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