From the World Bank late yesterday:
…a significant slowdown in China, though unlikely, would exert large spillovers, particularly on commodity exporters. In China, a disorderly unwinding of real and financial vulnerabilities could trigger a sharp slowdown in investment and output growth. A steep decline in property prices could force developers and banks to deleverage quickly, leading to a sharp contraction in real estate investment. A disorderly unwinding of local government financing could trigger a sharp slowdown in infrastructure investment. A wave of bankruptcies in primary and heavy industries suffering from overcapacity could seriously derail fixed investment in otherwise healthy industrial sectors. And excessive risk taking in the shadow-banking system could eventually force a rapid cutback in liquidity and credit, deeply curtailing investment.
A slowdown of this order remains unlikely, given the substantial policy buffers available. As discussed in the October 2014 East Asia and Pacific Economic Update, there are significant fiscal, institutional, and exchangerate buffers to prevent a disorderly unwinding of debt. Ample fiscal space is available to deploy targeted stimulus or bail out debtors. The savings rate is 50 percent of GDP, financial repression restricts savings outside the banking system, the financial system is still predominantly state owned, and capital controls on bank lending and portfolio investment prevent sharp outflows. Foreign reserves, at US$3.9 trillion, are by far the largest in the world, and net international assets exceed US$2 trillion.
However, should a sharp slowdown materialize, it would exert large spillovers across the region. A onetime 1-percentage-point decrease in China’s GDP growth relative to the baseline (stemming from a 2-percentagepoint decrease in investment growth) would reduce growth in the region by approximately 0.2 percentage points (World Bank 2014). The impact would be relatively larger for commodity exporters, and for economies more tightly integrated into regional supply chains (Ahuja and Nabar 2012). In addition, the significant negative impact on Australia and New Zealand, among the world’s largest commodity suppliers, would lead to indirect spillovers on the Pacific Island Countries, given their tight links through trade, investment, and aid”.
This is yesterday’s paradigm. The Chinese hard landing fear remains a real risk but the extant reality is even more problematic as China goes through a so far successful structural adjustment. The Chinese hard landing is already happening for commodity exporters as China transitions away from its investment-driven growth model.
