The surprise to me was how negative this story is and a huge potential global problem is what if the bears are right? What price avoiding a full-blown Western recession if China does slow to a grinding halt?
The IMF recently forecast China’s GDP to grow by 9% next year after a 9.5% growth this; consensus is probably slightly lower than this, maybe closer to 7%, but what if the most bearish commentator is right, and China grows by as little as 3% or less in 2012?
Economically, China has come out in favour of the euro, and given its support for the eurozone. It hasn’t actually pledged any new cash even though rumours were rife that Italy was about to go cap in hand before its recent downgrade. Its stance now is one of support for the region rather than individual countries so any eurobond may give it a more direct opportunity to help the region as a whole rather than an individual country.
But any Eurobond is probably months if not years away when Chinese support may have waned further as its own economy continues to slow.
At the same time, some business relations are slowing as some Chinese banks have stopped trading with some European banks. For example, Bank of China has stopped foreign exchange forwards and swaps with largely French and Swiss banks. According to yesterday’s South China Morning Post, some Asian banks have been cutting credit lines and exposure to European banks for the past few months.
So if the European/Chinese economic and banking money supplies are switched off, there is a vicious circle between Europe’s recovery slowing at the same time as China’s GDP does.
Our resident Hong Kong bear, economist Jim Walker, may be right when he says: “It will be a hard landing; when have you ever seen a soft landing? Our sister company Forensic Asia Research looks at crisis countries and use an index where the critical number is six. China and India, currently score around 5.7 – both are vulnerable to higher interest rates and lower growth and they are going to get both over the next 12 months.
This may just be one example and one opinion, but factoring in a more negative China story may be more realistic than pessimistic.
