Why the world should be watching China’s economy.
‘Wild swings’ in the stock market mirror slowdown in growth
OTTAWA • If for only a few minutes, try to forget about Greece — as many would surely want to — and spare a thought for another possible trouble spot: China.
True, although the globe’s No. 2 growth engine isn’t running on all cylinders, it’s not heading for the ditch, either.
But it also hasn’t been keeping pace with the expansion that the world had been counting on as an anchor while U.S. and European recoveries get back on course.
China’s equity markets have been taking a real whacking for some time now as a result. That’s disquieting enough.
Yet the real concern is any knockdown effect in the overall economy that might follow the weeks-long string of sell-offs in stocks.
The chance of that happening is debatable, though not impossible.
Chinese officials, though, are fully aware of the risks and over the weekend decided to cut interest rates for the fourth time in seven months.
The country’s central bank lowered the main lending level on Saturday by 0.25 points, to 4.85 per cent, saying the move would “sup- port rural, agricultural and small businesses.”
“Is China’s economy in for a hard landing if equity valuations truly plunge? That’s tough to believe, even if your average newswire writer has screamed at you to do so for many years and for a variety of shifting reasons,” said Derek Holt, vice-president of Scotiabank Economics.
“First, it was because of property markets and ghost cities. Interwoven throughout that story was a real investment bubble that would collapse the economy.”
Now, Holt added, “the doomsayers are saying equities will drag down the economy. Strike three? We’re not convinced.”
That’s because, on the plus side, China is still the most populous country in the world — 1.4 billion people, at last count — and household income is growing.
So is consumer spending, just not fast enough to keep pace with economic output.
For decades, developed nations have been hectoring the Chinese to stop hoarding their cash and start spending more to help rebalance the country’s heavily tilted export-and-investment economy.
In other words, the reverse problem that Canada has been facing since the recession.
One of the downsides for China, at the moment, is that households are indeed spending more, just not as much as they used to even a few years ago.
Slower economic growth has followed. The International Monetary Fund, in its April World Economic Outlook, forecast China’s gross domestic product would slow to 6.8 per cent in 2015, from 7.4 per cent the previous year, and ease to 6.3 per cent in 2016.
A weaker China would have a negative impact not just on Asia but on the global economy as well, the IMF warned, given its large economy “and deep trade and financial linkages with other nations.”
Which brings us back to the equities market.
Stocks on the Shanghai composite index have dropped nearly 20 per cent from their most recent peak on June 12. It lost 7.4 per cent on Friday alone.
Still, the index is up 30 per cent from the same time a year ago. So, why all the fuss? “Investors are in ‘wait-and-see mode’ on Greece,” Stan Shamu, a market analyst at IG in Melbourne, said in a note to investors.
Meanwhile, “recent falls in China are being greeted by mixed feelings among traders with a degree of skepticism that we could see a rebound at any time,” he said. “Reasons for the slump in China stretch far and wide, including deleveraging, frothy valuations and extreme volatility causing nervousness. While some markets in the region seem to have ignored some of the wild swings in China for a while, it’s now certainly casting a shadow on some key markets.”
So, while many fret over another “deadline” to save Greece from itself, try focusing on the bigger economic picture: China, again.
“Financial markets have been pushed and pulled by the offsetting forces of improving activity in the U.S. and Europe on the one side, and the Greek drama and lingering concerns over a slowing China on the other,” said Douglas Porter, chief economist at BMO Capital Markets.
“If Greece can be put to bed, at least temporarily, the underlying trend of rising bond yields and a firmer U.S. dollar are likely to reassert themselves in a big way.”
Here’s hoping.