Dragon shrinking

A slowing China has important consequences for the world

Our recent blog on a slowing China, written on LinkedIn, drew irritated responses from many Chinese. Nothing has changed in China and we will be up and running; was the standard response. Nothing could be farther from the truth! A 35% crash in markets that wipes out $4 trillion cannot be dismissed as insignificant. And the impact cannot be negligible when there are 90 million Chinese investors with unfettered access to cheap leverage.

The truth about China…

A nation that was growing its GDP at over 10% for close to 25 years has suddenly seen a 350 bps fall in GDP growth. Yes, China is likely to grow by less than 7% in the coming years. One can always argue about the base effect, but even then a sharp fall in GDP is never as simple as a base effect. The reality is that the China economic model which was predicated on cheap manufacturing is not holding any longer. A slowing Europe and weak US demand is taking its toll on China.

The export / import macros…

This has probably been the big disappointment for China. For the month of July 2015, China witnessed an 8.3% fall in exports; far worse than the 1.5% fall that was anticipated by economists. What is disconcerting for China is that its Europe exports have fallen by over 12.3% due to a distinct slowdown in the whole of Europe and the aftermath of the Greek crisis. US exports also fell in July; and it hurts because US is the biggest export market for China. Chinese imports for the month of July were also down by 8.1%, but that could largely be attributed to a sharp fall in commodity prices.

Is strong Yuan a flawed policy?

The Chinese government has been trying to keep its Yuan strong over the last few months. The idea seems to be to reduce its dependence on exports of low-end products and focus more on high-end manufacturing. A slowdown in exports and GDP will call for more stimuli; and it will be interesting to see how they maintain a strong Yuan with a stimulus package running. Only the US has succeeded in doing that; largely due to the dollar’s exorbitant privilege.

China must get its formula right…

China’s economic policy seems to be ironic, to say the least. It needs to stimulate the economy, but it does not want the Yuan to depreciate. Easy liquidity and a shadow banking system have created a mountain of bad loans in the system. Easy retail loans have created an overvalued stock bubble, which the government is trying its best to sustain. The mixture is a heady cocktail! There are analogies to Japan in 1989, before the lost decade. That may not be too much off the mark. ©

You can ask us your stock related questions with #AskReligareOnMarkets via our Twitter channel @religareonline

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