By G. Sharmila
On Wednesday, Citi global chief economist Willem Buiter told UK newspaper The Telegraph that there is a high and rising likelihood of a Chinese, emerging market and global recession playing out. However, Tiger thinks that Malaysia need not get paranoid just yet.
According to The Telegraph report, Willem Buiter identified excess capacity across much of China’s economy and a highly leveraged private sector as troubling indicators of the squeeze to come. Citi estimates that China is now growing at just 4%, well below the country’s official 7% growth target.
Should growth in China slow further still, Buiter said that many other emerging markets, already weakened, will follow, driven in part by the effects of China’s downturn for its exports, and for the commodity exporters, on commodity prices.
While Citi’s Buiter may be eventually proven right in some respects, Tiger doesn’t think that Malaysians should panic just yet about the Chinese economy tanking and an impending global recession as a result. Here’s why:
Malaysia’s diverse exports offer a buffer. Yes, Malaysia is a trade-dependent nation with China as a major trading partner. However, a regional economist, who Tiger spoke to yesterday, noted that Malaysia’s exports are well-diversified, including commodities, manufactures and services, and Malaysia has diversified export markets, which have helped to mitigate the impact of the China’s slowdown in 2015.
The economist said that while further Chinese growth moderation would have negative transmission effects on Malaysian exports, the US economy is showing signs of renewed strength following the 3.7% annualised gross domestic product (GDP) growth in the second quarter of 2015, and this should help to mitigate the negative impact of softer Chinese import demand.
China slowdown was not unexpected. If you believe the International Monetary Fund (IMF) chief Christine Lagarde (and Tiger certainly does), while China’s transition to a more market-based economy (rather than exports-led) “is complex and could well be somewhat bumpy”, Chinese authorities do have the right policies to manage the transition.
The IMF, in its annual assessment of the Chinese economy in August this year, noted that the slowdown, in line with the Chinese government’s target of around 7%, reflects progress in addressing vulnerabilities, especially a needed moderation in real estate investment.
The IMF said that even the stock market correction in August “will not derail the ongoing adjustment to a slower yet more balanced growth path”. Tiger couldn’t agree more.
China has given assurance it will not further devalue the yuan. Emerging market currencies, including that of the ringgit, all suffered when China announced its unexpected devaluation of the yuan in August.
Li Keqiang
But at the World Economic Forum yesterday, Chinese Premier Li Keqiang said China will never start a currency war by artificially devaluing the yuan. UK newspaper The Guardian said he has promised more measures to increase domestic consumption and also said Beijing will introduce policies to boost imports. This gives Tiger some assurance that a further devaluation of the yuan is not on the cards.
The China debt situation is under control. In a report on Sept 8, Fitch Ratings noted that the 34% rise in China’s local government debt from mid-2013 to end-2014 is significant.
It also said that major reforms by the country, to control higher leverage, monitor finances better and facilitate more sustainable sources of revenue, will mitigate financing costs and reduce risks associated with the debt.
Tiger is inclined to believe that China will not let the debt situation get out of control. Then again, only time will tell if it manages to do exactly that.
China slowdown may have little impact on the US. Most foreign-based analyst firms and economists are saying that the US’ recovery is so well established, that a further slowdown in China will not affect the US economy.
These experts have pointed out that the US isn’t that closely linked to China, with the country’s exports to China at 1% of total US GDP and Chinese direct investment in the US merely a fraction of a percent of total foreign investment.
Tiger has mixed feelings regarding this, seeing that the US was Malaysia’s fourth-largest trading partner last year and if the experts were wrong, a further slowdown in China could send the US economy and subsequently the global markets into a nosedive.
Will growth in China decrease to the levels that Citi is predicting? Only time can tell, and time is a finicky creature.
However, Tiger would like to reiterate to Malaysians not to panic just yet, as China seems to have the right policies and initiatives in place to protect its own economy, as it has done repeatedly in the past.
GRRRRR!!!
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