Growth rates in China fall precipitously. China’s nonperforming loans soar. Banks stop lending, consumer confidence tanks and the yuan falls sharply. These are among the assumptions laid out in a series of recent worst-case scenarios on what a collapse in China might look like and what the global spillover effects would be.
There is a long history of doom-and-gloom predictions focused on the world’s second-largest economy. China tends to attract such unwanted attention in part because it is so big and important, has a murky decision-making system that is difficult to interpret and because its recent policy and communication strategy–particularly involving the stock and currency markets–has been wobbly, analysts say.
“I’m not a collapse-ist, but there is reason people should be concerned,” said Arthur Kroeber, managing director with research firm GaveKal Dragonomics Research. “Having some paranoid people out there with their worst-cases scenarios is of value.”
Such minor risks–so-called because they seem unlikely–can be overlooked, economists add. They point to the U.S.-led global financial crisis and the collapse of the Soviet Union. “Economics isn’t rocket science, and even rockets frequently land in the wrong place or explode in mid-air,” said Citibank C -1.45% economist Willem Buiter, in his bank’s scenario involving a global recession sparked by China.
UBS AG in its exercise on doom-and-gloom assumes that a whole rash of bad things happen simultaneously and that investment, China’s traditional engine of growth, contracts outright–oh my!–pushing China’s growth rate down to 4% from its current level of about 7%.
Fitch Ratings goes even further with a scenario that sees China’s average growth rate falling to 2.3% over the next three years as inbound investment declines by 40%, bad debt soars, global consumer confidence tanks and the yuan depreciates. And Oxford Economics lays out a global slump fueled by “lost decades” of little or no growth in both China and India, lower productivity, weaker investment growth and a large drag caused by excess debt.
Those embarking on these Chicken Little exercises say the chances of them happening are small. “The scenario varies greatly from Fitch Ratings’ current expectations,” the firm said in understated financial speak.
There goes the neighborhood.
If the Asian giant were to hit the skids, however, among the most affected countries would be China’s neighbors, most scenarios agree. UBS sees Japan slipping into recession and Australia barely growing, while Fitch sees the Hong Kong, South Korea, Japan, Taiwan and Singapore economies getting slammed as Asia-Pacific growth rates decline to 1.8% over the next three years, down from an expected 4.2%.
But you wouldn’t have to live next door to feel the pain, researchers add. Fitch said global growth could slow to 1.8% in 2017 from the 3.1% forecast as companies world-wide in the oil and gas, steel, mining, chemicals and shipping industries get hammered, along with resource-dependent economies such as Chile, Brazil, Russia, Mexico and South Africa, under some scenarios.
That’s on top of the hurt many industries are already feeling related to China’s weakening economy. Fitch said 25% of oil-and-gas companies and 52% of other commodities companies were rated “below investment grade” as of November.
BMI Research focused its doom-and-gloom crystal ball on a slow-motion financial crisis in which Chinese companies default and market interest rates rise sharply, prompting Beijing to bail out banks, slash interest rates to near zero and buy bonds directly, leading to significant yuan depreciation.
The suffering wouldn’t be universal, researchers said. The dollar and euro would likely strengthen given their role as havens. And by some assessments, large multinational companies in such industries as pharmaceuticals and telecommunications services wouldn’t be hugely affected.
“Of course these risks are overstated. I don’t think China’s economy is likely to collapse,” said Renmin University professor Shi Yinhong. “But sometimes even Chinese themselves have difficulty understanding China’s policy-making process.”
“Everyone was used to China’s high growth, but now it’s slowing and we’re at a historic turning point,” Mr. Shi added. “So people have curiosity about China. It’s natural.” http://blogs.wsj.com/chinarealtime/2016/01/07/chicken-little-with-chinese-characteristics/
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