Global Influence of the China Slow down
Does the world catch a cold when china sneezes?
The performance of the Chinese economy - together with other emerging economies - is extremely important because this group has been the main driver of global growth since the global financial crisis.
Thirty years ago China launched economic reforms that would transform the country and its place in the world. At a speed no one could have predicted even a decade ago, the nation has re-emerged as a global player on multiple fronts. Today it is the world’s second largest economy and it is slowing down and many fear the ripple that will affect all the other countries, countries and people dependent on it.
In a recent report published by Fitch Warlick he warned that a sharp slowdown in China's GDP growth rate to 2.3 percent during 2016-2018
"would disrupt global trade and hinder growth, with significant knock-on effects for emerging markets and global corporates. In turn, this would keep short-term interest rates and commodity prices lower for longer."
Global GDP growth is currently expected to be 3.1 percent in 2017, according to Oxford Economics' global economic model, which was used by Fitch to frame its "shock" China scenario. But if a slowdown of such a magnitude materialised in China, Fitch said global GDP growth would slow to 1.8 percent in 2017.
Countries and Companies dependent on China: An Example
China is the biggest market for goods produced by some nations.
Consider Chile, which has had a strong economy in recent years. Almost 25% of Chile's exports go to China.
Trade makes up 10% of Chile's economy, twice that of the United States, according to the World Bank. So countries like Chile that rely heavily on trade for economic growth and trade a lot with China -- namely Brazil, Indonesia, Japan -- have direct exposure to China's economic decline.
With the Chinese buying fewer goods or commodities, it's dragging down those countries' economies and commodity prices. The point is that Chile's economy is a microcosm of what's happening in many countries across the globe. Less trade with China translates into weaker economic growth.
Just about everyone with any connection to China is getting hit. Car companies like Ford, BMW and Volkswagen are seeing sales in China fall. Luxury brands such as Prada and Coach have seen profits from China decline. Australian steel company Bluescope Steel warned this week that it would close one of its plants because of worries about Chinese demand combined with low prices. The closure would lead to about 5,000 job losses.
Even U.S. tech giants Apple and Microsoft are affected.
Apple's sales in China are way up from a year ago, but its revenues from China dipped between the company's second and third quarter this year. Microsoft too has experienced a China-related sales slowdown too. The strong US dollar isn't helping these companies sell their stuff abroad either.
Overall the U.S. economy is less exposed to China compared to the countries. Only 2% of S&P 500 revenues are directly linked to China, according to Goldman Sachs.
However, even this understates the problem. Keep in mind: 44% of revenues for S&P 500 companies come from outside the U.S. So while direct sales to China are a small piece of the pie, sales to other countries are huge and they are already impacted by the ripple effect from China's economy.
A Domino effect
It gets worse. Even companies that don't have much direct exposure to China are affected, which maybe the global economy’s biggest problem right now. For example, look at a stalwart American company from the heartland: Farming equipment manufacturer John Deere. Most of Deere's sales are in North America, but 40% of its sales come from overseas.
Deere's sales in China are down "moderately," but its sales in South America are projected to be down as much as 25% this year, according to the company. Much of the drop in South American sales can be linked to China, experts say.
How does the domino effect work from China to John Deere:
- China imports lots of agricultural commodities. China's slowdown has caused commodity prices to plummet.
- South America is a major exporter of commodities that require farming equipment -- soybeans, sugar and coffee. Countries like Brazil send lots of their commodities to China.
- With lower commodity prices, farmers don't really have much money to spend on Deere equipment. "Farmers will make less money and will have less [cash] to spend on farm machinery," says Brett Wong, senior research analyst at Piper Jaffray.
After tracing China's financial and trade links around the world, it's clear that a greater-than-expected deceleration in Chinese economic activity would have far-reaching implications for global growth, corporate credit quality and monetary policy.
As said in an interview by R Ganesh, CEO and MD of Tata Asset Management,
“Even India is not insulated against the slow down of Chinese economy and this slowdown is a bigger concern for us then the increase in US Fed interest rates".
The Future
Latest economic data suggest that the economy has slowly started to stabilise following the massive stimulus measures Chinese authorities had launched after the summer stock market crash. In November, retail sales continued to gain traction, while growth in all-important fixed-asset investment was stable for the first time since June. On 30 November, the IMF decided to include the Yuan in the Special Drawing Rights (SDR) basket. The Yuan will join the elite currency club starting from 1 October 2016 and, while a strong immediate impact is not expected, this represents a major backing of China’s economic reforms.
Meanwhile, China's top leadership pledged to take steps to ensure a
"stable and relatively fast"
economic growth next year as it wrapped up the three day Central Economic Work Conference.
This gives some hope to the global market but the economic condition remains uncertain with the weak global demand and fall in the prices of commodities making it’s way into 2016.
Source: CNNMoneyinvest, World Economic Forum, Focus Economics, CNBC