The risk of a “severe correction” for China has “grown substantially”, according to Credit Suisse.
The investment bank had forecast a continued managed slowdown of GDP growth in 2016. But in a note sent to clients this week, fixed income Ric Deverell and his team say that fears are growing that Beijing is losing control of the economy. The perception that it is losing control could, in turn, hit real economic growth as it dents consumer and investor confidence.
Deverell and his team say:
Put simply, recent policy announcements related to inter alia equity markets and the currency have added to the sense that policy makers are no longer fully in control of their own destiny.
China has been throwing the kitchen sink at its stock market in recent weeks to try and prop them up, with limited effectiveness. Meanwhile, China is also fiddling the yuan fix — a surprising move that is confusing people. It looks like its getting harder and harder for Beijing to paper over the cracks in its creaking economy.
The big issue that China is facing is a structural slowdown, Credit Suisse says. Growth rates are reverting to the norm after a temporary, one-off boost in the 2000s thanks to China’s entry into the World Trade Organisation.
The idea that China’s economy is cooling isn’t new, but a combination of low oil prices and government tinkering have caused concerns to blow up once again, Credit Suisse says.
Analyst Dong Tao writes in the note:
Much of China’s turbulent start to 2016 can be attributed to policy relating to both the economy and the currency. There is growing popularity for “supply-side economics” among decision makers in Beijing. Although this is positive in the long run, it is negative for growth in the short run.
The focus is on the elimination of excess industrial capacity, reduction of housing inventory, and financial deleveraging. That is under way. Steel mills, cement factories, and coal mines are being closed. Anecdotally, however, workers from the closing factories are not being laid off (some chose to retire) but are being transferred to other surviving SOEs [state owned enterprises], meaning that other factories face additional costs. Infrastructure investment is still slowing.
And the anti-corruption campaign continues, leaving more SOEs, banks, and local government demoralized and unwilling to lend or spend.
China is hoping a rise in consumer spending can help make up some of the lost growth, providing a soft rather than hard landing.
As a result, the government is trying to “rebalance” the economy away from things like raw material production and manufacturing towards more sustainable jobs.
But Credit Suisse is sceptical that this rebalancing will work. Here’s the bank (emphasis theirs):
While the challenges to investment and production are now well known, if not understood, many believe that China can offset the weakness by increasing the pace of consumption growth.
Although there is no doubt that consumption remains a relative bright spot for China, we think that it will be difficult to increase the pace of consumption growth at a time when investment comes under further downward pressure.
All this is bad news for the rest of the world, as a slowdown in China has huge knock-on effects for confidence elsewhere. Markets around the world have been tanking over the last two weeks, with China a key concern.
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