China released its 2015, fourth quarter results on Tuesday, which verified a growth rate good by any global standard but exceedingly low by Chinese. The last quarter the Chinese economy was galloping at 6,9%, which brings us to an annualised 6,8%. These headline numbers are hardly the staff “crises” are made of.
The deceleration of the Chinese economy is gradual, going from 9,5% in 2011, to 7,3% in 2014, to 6,8% in 2015; 6,3% is projected for 2016. Some suggest that quarterly and annualised figures are too neat and too gradual. Using proxy growth indicators, such as electricity consumption, some estimate that 2014 growth was closer to 5,6% and, perhaps, much lower this year. China is a $10 trillion GDP economy and now the world’s second largest. Were there to be a Chinese crisis, it would be global.
But, China is still growing, so why is there so much panic. Chinese businesses borrow on the assumption of growth for more than a generation. Million makes their way from the countryside to urban centres, and the job market has been able to absorb them. And most commodity producing countries have been operating with the underlying assumption of Chinese growth. So, if China were not to grow, there would be contagion.
The first wave of contagion has been already evident. Commodity prices are tumbling, with oil prices at 12-year lows and a loss of 20% since December. The steel industry is shedding jobs across Europe, and emerging market currencies are depreciating. The soothing argument is that China is on the point of transition from emerging to a mature economy. That is not always verified by numbers, as for example the retail industry saw 11% deceleration in December. Even if there is a surge in the service sector, that is no consolation to commodity producing countries, from Australia to Chile, and from Saudi Arabia to South Africa, which has come to rely on Chinese demand. This trend of slowing demand in emerging markets will trickle down to a range of consumer and capital goods, from cars to machinery, of the kind that Europe exports. Also, because Europe is a significant energy and commodity importer, like China, there is increased deflationary pressure that is impacting on growth. For the foreseeable future, there will be low-interest rates, which is terrible news for savers.
The second wave of contagion would come from debt. By mid-summer, when Chinese deceleration triggered panic in capital markets, everyone was calculating the debt exposure, private and public, of China. At the beginning of 2015, China’s debt to GDP ratio, private and public, stood at 282% debt-to-GDP. The deficit is not that big of an issue, and banks have been prudent. What McKinsey Global Institute found worrying is that much of private household debt concerned houses that are now worth less than when the loans were taken out. And that was before the full scale of Chinese economic deceleration was known. Besides, there is a large shady finance sector – not banking finance – that is hard to consolidate. Major European banks, such as HSBC, are significantly exposed to China.
Last but not least, China’s currency has recently been granted by the IMF the status of a global reserve currency. China is currently accelerating the pace of globalising its economy in an effort to see its economic leverage institutionalised. Through the Asian Infrastructure Investment Bank, it has been promoting the “One Belt, One Road” vision of linking its economy to the world, especially Europe. For instance, the European Commission’s plan to mobilise €315 bn of investment is very much predicated on Chinese investment. If anything, the crisis is emboldening China’s global outreach as an investor, especially in Central Eastern and Southeastern Europe.
The underlying logic resembles that of the Marshall Plan. China is using its liquidity to allow its biggest trading partner to grow, whilst consuming Chinese products. One may choose to call this China’s pivot to Europe.