China’s policymakers have been making moves to cool off its debt-fuelled economy.
Economists believe growth will slow to around 7.4% in 2014 from 7.7% in 2013.
Societe Generale’s Wei Yao sees 6.9% growth in her base case scenario. But she warns that there is a risk that China’s transition could prove disorderly, causing the economy to slow much more than anyone expects.
With China slowdown concerns making news lately, SocGen clients’ top question in the past week was “How likely is China hard-landing?”
Yao assigns a 20% probability of a hard-landing, which she considers to be growth of 5% or less. Here’s SocGen’s Michaela Marcussen telegraphing Yao’s commentary:
We have long argued that the need to calm the debt- financed investment would drive the bumpy landing of the Chinese economy now materialising. To date, the perception amongst Chinese investors has been that the government offers an implicit guarantee to all financial products. So far, this assumption has been generally correct. Our view remains, however, that to be serious about its policy of deleveraging and financial market liberalisation, the government will have to allow for defaults (with losses assumed by private investors). We believe that Chinese policymakers remain determined to slow credit and expect to see the first defaults in 2014. The risk is that this could spark panic amongst investors, triggering a wave of defaults amongst the weaker borrowers that depend on the shadow banking system. Nonetheless, given that the government still retains significant control over the financial system, our base case remains that a systemic crisis can be avoided.
Our forecast of 6.9% GDP growth in 2014 is, however, below consensus and we set a probability of 20% on GDP growth dropping below 5% in 2014. Modelling the global impact hereof, we find that this would knock around 1.5pp off global GDP in the first year after the shock. Other emerging economies would be particularly hard hit through the channels of (1) direct trade links with China, (2) falling commodity prices for commodity exporters and (3) increased risk aversion in financial markets.
Meanwhile, Deutsche Bank’s Jun Ma has taken the extreme contrarian position of forecasting economic acceleration in China. He sees 8.6% growth in 2014 and 8.2% growth in 2015.
“We maintain our non-consensus view that growth in China will pick up sharply this year driven mostly by stronger exports, as well as reduced overcapacity,” he said.