The Dragon Economy slows Implications for the UK & the world economy
Marcus Wright RBS Economics August 2015
China’s slowdown has been on the cards for a while
China’s economic growth has been unprecedented in scale & duration. But this well trodden path of investment-based growth has been seen before. China’s issue is it looks to have gone too far.
Investment as a share of national income (%)
China (1996-2013) Japan (1955-1985)
40% S. Korea (1976-2006)
11 Years 21
Source: Macrobond 2
The China checklist – what’s happening?
1. Downward pressure on growth
2. Depressed rates of world trade growth
3. Downward pressure on inflation
4. Global interest rates likely lower for longer 5. Strained financial links to China
6. An all-out credit crunch in China
China’s growth is slowing fast, however you measure it
China appears to be slowing more than the headline figures suggest. The growth prospects of commodity producing countries & other emerging markets with close ties to China have been damaged.
GDP Growth Proxy - Y/Y Change GDP Y/Y Change
2003 2006 2009 2012
Source: Bloomberg, Macrobond, RBS Economics 4
A big reason why world trade is so bad right now
40% Emerging Asia Import Volume (% Y/Y Change)
20% China induced
Asian Financial Crisis
1995 1998 2001 2004 2007
Global Financial Crisis
Source: Netherlands CPB 5
Yuan devaluation - the cherry on the disinflationary sundae
Emerging Market Currencies
South Africa Mexico
Malaysia Russia India Poland Brazil
Causes of Inflation Variability in 80 Advanced Economies (%) 60 40 20
0 1971-85 1986-98 1999-2013
Common factor Chinese export prices
• Yuan devaluation has grabbed the headlines recently. But it is not yet the big story.
• China has been exporting disinflation for a while now. And it is becoming more and more of an influence on world prices.
Source: Macrobond, BIS 6
Global interest rates lower for longer
Number of months from 1st rate hike to
first rate cut
Canada (Jun-10) Iceland (Sep-11) Norway (Nov-09)
Israel (Aug-09) Australia (Oct-09)
Korea (Jul-10) Poland (Jan-11) Hungary (Nov-10)
Chile (Jun-10) Sweden (Jul-10) N.Zealand (Mar-14) N. Zealand (Jun-10) Eurozone (Apr-11) Denmark (Apr-11) Turkey (Jan-14)
9 7 7 4
26 25 25 24 22 21 19 17 15
All of these OECD central banks have raised rates since the financial crisis. All have had to lower them again.
Source: Bloomberg, Macrobond 7
Greece has grabbed all the headlines. It shouldn’t.
Greece Spain Italy
Change in UK financial sector exposure
(2009 - 2015)
-100% 0% 100% 200% 300% 400%
• While the UK has decreased its financial exposure to most countries since the crisis, loans to China have skyrocketed.
Global Banking Sector Exposure 1,000 to Greece and China ($ Bn)
Greece 500 China
2005 2007 2009 2011 2013
• The world’s attention has been focussed on Greece. But the world’s banking sector is 17 times more exposed to China. And that is before we count exposure to Hong Kong.
Source: BIS, Macrobond 8
An impending credit crunch?
China’s banking sector is sitting on problem loans far in excess of official figures. Other countries’ experiences suggests it could be in for something worse than a slowdown.
120% 80% 40%
Rise in private sector
credit as % of GDP in the six years to.....
52% 60% 42% 42% 24% 32%
Indon. - US - Japan - S. Korea UK - Sweden China - Thailand Ire 1997 2009 1992 - 1997 2009 - 1990 2014 - 1997 2007
Source: Macrobond, IMF 9
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