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A hard landing for China?

Andy Brunner  |  12 Jan 2015Text size  Decrease  Increase  |  

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Andy Brunner is an investment strategist with Morningstar UK.

 

It is well-known that growth rates in the Chinese economy are in long-term structural decline as the authorities attempt to transition to a slower and more sustainable pace of growth. But how far will growth rates fall in 2015 and what are the chances of a "hard landing"?

Simplistically, the Chinese authorities are attempting to manage a slowdown in the economy as the prior foundations of growth, principally debt-driven fixed-asset investment, are gradually replaced by new sources of demand mainly from the consumption, infrastructure and service sectors.

This economic transformation is difficult enough but the problems spread right through the financial system and the whole reform process is overshadowed by the legacy of a massive build-up in debt. The aim is to manage the necessary changes but without allowing the investment boom and credit and real-estate bubbles to burst.

This is a highly complex process that has generated considerable debate among commentators as to whether the authorities can effect such a transition.

Some believe an economic "hard landing" is inevitable, but the majority believe the Chinese authorities understand the risks, are implementing a comprehensive reform process and have the resources to manage the slowdown over a prolonged period.

More recently the authorities have been micro-managing, producing mini-cycles, a process of demand management that is likely to persist. For 2015 the government is also accelerating infrastructure investment with new project approvals, which should help mitigate the impact of the downturn in property investment.

Additionally, the People's Bank of China has introduced new monetary measures and is likely to cut benchmark interest rates to help support growth of around 7 per cent next year.

Much of Asia Pacific/EM has suffered from downward revisions to growth forecasts in 2014 and many commentators have focussed on the impact of falling commodity prices, rising US interest rates and slowing Chinese growth.

What is the outlook for 2015? Given the large number of countries and many different regions this is not an easy question to answer. It is probably fair to say, however, that economic imbalances within EM as a group have improved over the past few years and most countries enter 2015 with expectations of stronger economic growth.

It should be remembered that much of 2014's economic weakness was concentrated in Latin America and Europe, the Middle East and Africa (EMEA), while the Asia-Pacific region (ex-China) has generally matched expectations. With a difficult year ahead for Brazil and Russia, neither region is expected to shine despite some much stronger growth forecasts for many countries in both regions.

Growth in Asia (ex-China) is predicted to trend higher, led by resurgent activity in India. The other key economies of South Korea, Indonesia and Taiwan are all estimated to see strong outturns and, in aggregate, GDP growth could reach 5 per cent, following three successive years of 4 per cent growth.

Naturally, countries are affected differently by the collapse in oil prices, demand from the US and China, but many Asian countries have the potential to cut policy rates given the disinflationary trends and the need to offset tighter monetary conditions.

Most countries are a net beneficiary of falling oil prices, especially India and South Korea, although obviously Russia and Brazil are seriously affected by lower commodity prices.

As ever, there are divergent trends across and within the regions but overall, emerging markets are forecast to produce a modest advance in GDP growth to around 4.5 per cent.

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