China’s slowdown raises questions for global economy

WASHINGTON’: The Chinese economy, weighed down by electricity shortages and a vast real estate crisis, has lost its lustre recently, to the point where economists are starting to question its impact on the global growth it has helped drive for more than 20 years.

The difficulties of the real estate sector in China triggered by the troubles of giant Evergrande could pose risks for the world economy and affect the United States, the Federal Reserve warned in its report on financial stability.

That is a marked change of tone from September, when Fed chairman Jerome Powell still believed the world’s largest economy was not really directly exposed to difficulties in China.

Evergrande, estimated to be worth some 260 billion euros, is one of the biggest companies in China. Its financial situation is closely scrutinised because its collapse would deal a serious blow to the growth of the Asian giant.

The real estate sector is estimated to account for 25 per cent to 30 per cent of China’s GDP. In the third quarter, the gross domestic product, suffering from the Evergrande crisis, grew 4.9 per cent on a year-on-year basis, down from 7.9 per cent in the second quarter.

“So far, the likes of the Evergrande debacle has been contained by the Chinese official sector buffering,” said Padhraic Garvey, regional head of research for the Americas at financial institution ING. But he admitted there were “unknown risks”.

And he said the Fed cannot ignore the fact that “China is right up there as a factor given its size, and the size of its financial sector”.

In October, the International Monetary Fund revised downwards its expansion forecasts for China, counting on 8 per cent, or down 0.1 per cent.

Its chief economist Gita Gopinath stressed that the institution is “paying very close attention” to developments in the Evergrande crisis.

“Our view is that the [Chinese] government has the resources and the ability to ring-fence the problem, which means that while we will see a shakeup happening in the real estate sector, it will be contained and will not spill over more broadly” to China’s economy, Gopinath told CBS News.

The IMF expects the global GDP to rise 5.9 per cent this year against 6 per cent in July. Beyond the real estate crisis, a slowdown in the world’s second-largest economy has been anticipated by many economists, as the Chinese government, which is anxious to reduce debt, slows down investments by local authorities and tightens conditions for bank loans.

‘Extinction of engines’

China is expected to experience an average growth of around 3.5 per cent for the next decade, or about half the growth rate of the 2010s, according to the Conference Board projections released last week.

The US research group estimates that the Chinese economy will settle on “a long soft fall” trajectory over the next decade.

Still, “the economic slowdown in China represents a kind of extinction of engines for the world economy”, Gregory Daco at Oxford Economics said.

However, he said: “The dynamic still remains favourable for the moment,” especially since the slowdown in China is partly offset by “relatively robust growth in the United States and in Europe.”

“We are witnessing a kind of pendulum effect, which made it possible to avoid a pronounced slowdown in the third quarter of the world economy,” and this effect will undoubtedly continue until the end of the year, Daco said.

In the longer term, the inevitable slowdown in Chinese growth, which is also linked to the aging of its population, will lead to a reshuffle of regional economies.

The countries that are currently very dependent on China such as Indonesia, Vietnam or Thailand should loom larger in the global economy, as is India already.

As for Latin America, “everything will depend on political stability”, Daco added.