We just told you how Société Générale is warning that an economic perfect storm is brewing.
Emerging economies and Europe will prove the main catalysts, the firm said in a note.
But in the report, it also said also honed in on China, an economy that they warn is at risk of slowing faster than the world is prepared for.
Although China is not in a similar situation as many EM countries in focus, the risk of a hard-landing of the Chinese economy is not negligible. However, the most likely trigger is that Beijing’s gradual deleveraging plan gets out of control, which would lead to shadow banking failures, a liquidity crunch and financial market turmoil. The Fed policy might play a supplementary role by giving extra incentives for capital outflows.
Our central scenario is still one of a bumpy landing, with a below-consensus GDP growth forecast of 6.9% for 2014. The foremost reason is the persistent slowdown in credit growth since June last year, which looks set to continue throughout 2014. Decelerating investment growth will most likely follow and, more importantly, we expect disruptions in the Chinese financial market. Last week, China just narrowly avoided one trust product default, but it is not the end.
We think defaults will still occur during the year of the Horse, as having defaults is a necessary condition for a healthy financial market (thus good for the long run). Nonetheless, the transition away from 100% state guarantees will be nothing but risky (see editorial). Although we think that Chinese policymakers will be able to avoid a systematic financial crisis, the bumpy landing we foresee means that China is likely to remain a source of jitters to emerging markets in 2014, in addition to the Fed’s policy.
We saw the official reading for China’s purchasing manager’s index drop on Friday. On Tuesday we’ll get the country’s composite PMI.
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