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Dr Doom, Analysts: China Will Be the Next Source of Recession
Aspire | 10 August 2015
By: Lim Si Jie
Articles (169) Profile

Heads up, investors! China has something more to offer to the current global economy: Recession. With a stock market crash in China, an imminent bailout deal in Greece and earnings season kicking off in the US, global markets continue to trudge forward.

China: Biggest Source of Vulnerability

Over the next couple of years, China is likely to be the biggest source of vulnerability for the global economy. Dr Doom joins a group of bearish analysts, including Morgan Stanley, Mark Mobius and Societe Generale, who believe that a continuation of China’s slowdown in the next few years may drag global economic growth lower by two percent.

Transiting Economy

The International Monetary Fund recently cut its forecast for global growth this year to 3.3 percent, down from an estimate of 3.5 percent in April, citing weakness in the U.S. While IMF left its projection on China unchanged at 6.8 percent, the slowest since 1990, it cited “greater difficulties” in the country’s transition to a new growth model which poses a risk to the global recovery. China’s economy will also continue slowing as the country struggles to reduce its debt.

Two Is the Key Number

When it comes to global economic growth, two percent is a threshold which analysts hold as an equivalent to a world recession. If China’s economy grows only at 4.8 percent this year (based on 2014 predictions), it would lead to the first global slump over the past 50 years without the U.S. contracting.

While China’s growth is slowing, the country’s influence has increased as it became the world’s second-largest economy. China accounted for 38 percent of the global growth last year, up from 23 percent in 2010, according to Morgan Stanley.

Influence of the Chinese Economy

China is the world’s largest importer of copper, aluminium and cotton, and the biggest trading partner for countries from Brazil to South Africa. It currently makes up almost half of the world’s industrial commodities consumption.

Dr Doom believes that an economic slowdown in China could have a wide ripple effect. An economic slowdown in China will affect the demand for industrial commodities for all the resource producers: Argentina, Brazil, the Middle East, Central Asia, Africa, and Australia, leading to a huge adverse impact on the global economy.

Radical and Unprecedented Measures

China’s $6.8 trillion equity market slumped more than 30 percent in four weeks through June over the last few weeks. This happened after a yearlong rally accompanied by record borrowing and surging valuations ended in a bear market, wiping almost $4 trillion in market value. In order to instil confidence back to its stock market, the Chinese authorities implemented unprecedented measures such as implementing billions of dollars of stimulus, cutting rates to record low, and ordering state-run funds to buy stocks. China has also allowed the mass suspension of shares to stop the ongoing market collapse.

Lost Control

However, the unprecedented government intervention used to bolster the market failed to inspire confidence. Mark Mobius opines that the measures that Chinese authorities are putting in place to top the market rout suggests of desperation. “It actually creates more fear because it shows the Chinese authorities have lost control.”

The Chinese authorities including their central bank have now lost a huge amount of credibility with investors and bystanders alike. Unlike the western authorities whose reputation for economic management remains in tatters after presiding over the Global Financial Crisis (GFC) in 2008, the Chinese authorities had earned high credibility for their handling of the 2008 crisis.

Shunning Chinese Stocks

Major investors are shunning Chinese stocks and those in countries that rely on China for growth, including Brazil, Russia and South Korea. Instead they are favouring companies in Eastern Europe and smaller Asian countries, such as the Philippines, Vietnam and Pakistan.

 

 

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.


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