Chinese economic growth slowed to the lowest level since 1999 last year, expanding 7.7%.
Policymakers have recognised the need to rebalance economic growth and are now slowly transitioning away from a credit and export driven economy to one driven by consumer growth. Some argue that the recent crackdown on shadow banking and the money market rate spikes are part of this effort.
But what sort of ripple effects impact is all of this having on the global economy?
First, let’s take a look at economies that rely on China to consume their exports.
Bloomberg chief economist Michael McDonough tweeted this chart that shows the per cent of country’s total exports consumed by China.
And this chart from McDonough shows the countries most dependent on China for their exports:
A marked slowdown in China would obviously have a significant impact on these economies.
“Australia’s export prices have been declining for some time because they’re more dependent on the Chinese business and industrial cycle,” SocGen’s Alvin Tan told our Steven Perlberg.
Dylan Grice perfectly summed up Australia’s predicament, by describing the country as “a credit bubble built on a commodity market built on an even bigger Chinese credit bubble, Australia looks like leveraged leverage, a CDO squared.“
But it isn’t just at a national level. We’re also beginning to see the impact of the slowdown, the reforms, the credit crunch, efforts to curb pollution, and other issues in the earnings of various companies with exposure to China.
The overall commentary is mixed but we highlighted key insights from those worried about China.
Mastercard CEO, Ajaypal Banga said: “In Asia Pacific, consumer and business sentiment levels declined in the fourth quarter across major markets, including Australia. In addition, worries about slowing growth in China go beyond being just a domestic issue and have broader implications, as you all know, for other markets that depend on Chinese demand.”
“…Asia is dominated by what happens between China, Japan, Australia and India. And if you think about China — yes, China’s growth has slowed, but China’s growth has slowed first in domestic expenditure, which impacts us very little because we don’t get to play in the domestic processing yet, right? Japan is actually beginning to show signs of life. Australia depends a great deal on what happens with China because Australia’s economy relies a great deal on the exports into China.”
LVMH Moet Hennessy CEO, Bernard Arnault: “The global economic climate and this will come as a surprise to no one, a number of high growth countries have slowed a little on the one hand, furthermore China has taken a number of measures that were implemented during the course of the year such that the consumption of luxury or rather high end products has been slowed slightly in some areas that was not the case, bit more in wines and spirits, you will see that a number of wines and spirits companies have presented their results and we’ve seen that iconic sales have been hit with Mr. Nava, we’re fortunate in being very responsive. So, bottles that weren’t sold in China were sold elsewhere, but it did nevertheless impact the momentum somewhat. So generally speaking, slightly less growth and dynamism in a few emerging markets.”
Boeing CEO, Jim McNerney: So I think from time-to-time we do have these currency flurries. China as they go through their leadership transition, there is some uncertainty and a point or two of slowdown in the overall economy as they try to get their feet underneath them with the new leadership. I don’t think the China story has changed firstly. I see the currency as a country by country. And I think the big picture and so I don’t see an epidemic at this stage.
Royal Caribbean International CEO, Adam Goldstein: “…We have a lot of work to do, and as you mentioned, the Japan-China dispute is still a wildcard that we’re having to work our way around.”
Caterpillar CEO, Douglas Oberhelman: “Let me add a little bit on China. We are watching it very, very closely from a couple of aspects. Obviously liquidity in the banking system, and we keep a close eye on that, as well as their reform efforts. And we have been laser focused on being a leader in China, and that’s, again, around building field population.
“So we have seen our market share go up, our field population go up, and our business go up as a result. That is not to say China is not without lots of caution, which we are very much aware of, and we watch that every day. But at the same time, we have to have our dealers, with a field population they can work on, when times are bad or good. So that’s really our focus, is that business model inside China.”
Texas Rare Earth director, Jack Lifton: I don’t know that, quite frankly, where mining is in any way an environmental problem or would be an environmental problem in the United States as long as we obey our own rules. Chinese don’t do this. They’ve made a mess of it. They are slowing down. They don’t care how important the rare earths are to their overall economy. The government in China cares about how important survival is to it, the government, so they are cracking down on environmental pollution. This means a severe contraction, and starting now, in Chinese rare earth production. Since the Chinese are the only producers on earth of heavy rare earths, it means a real crunch for heavy rare earths. And this is not going to be a momentary thing.
Many expect economic growth to slow further to 7.5% in 2014. Societe Generale’s Wei Yao expects 6.9% growth this year.
“On one hand, we are strong believers that the new leadership will go ahead with painful short-term adjustments for the long-term good,” she write. “On the other hand, we are well aware that it would never be Beijings intention to push the economy into a hard landing.”
We’ll be watching closely to see how this plays out.