Is China a replay of the US in 2008, or Southeast Asia in 1997?
An ongoing stock market slump and a currency devaluation last month have fuelled fears of a hard landing by the world’s second biggest economy unleashing a so-called black swan–an unexpected shock–on world economy.
Though Chinese leaders have tried to talk up the market with assurances that the stock market bubbles have been unwound, the currency is stabilizing and the economy will keep growing at 7% for another 4 to 5 years, many still remain unconvinced, and Societe Generale is among those keeping a wary eye on China, Yahoo reported.
The French multinational financial institution sees a 30% probability of China’s hard landing and assigns a slightly higher, one-third, chance of China triggering a global recession.
“On the major risks that we see over the coming year, China dominates the downside risks while US dominates the upside,” says a research report by Societe Generale.
China fears have already hit the broader emerging markets. The MSCI Emerging Market Index fell 12.5% in August, the fourth straight month of decline.
Though it does not buy allegations that Beijing is misreporting data, Societe Generale argues that real gross domestic product growth probably slowed more than reported in recent quarters, due, at least in part, to insufficient adjustments to the deflator.
Correcting for this factor lowers real GDP for the first half from the officially reported 7% to 6%, it says. The strong contribution of the financial sector, which contributed a full percentage point to first-half growth, is not sustainable, the report added.
“China’s structural growth deceleration is only halfway through, and under the weight of debt and excess capacity, weakening investment demand will remain the main culprit.”
Societe Generale assigns only a one-third chance of China’s hard landing triggering a global recession because of China’s low integration into the global economy. That is very different from the 2008 crisis, when problems in the US rippled across the globe.
Emerging Market Crisis
Any China-related upheaval, according to Societe Generale, would be more like a “classic” emerging market crisis, such as the 1997 Asian crisis. The crises in 1997 and 2008, apart from severely affecting regional and world economies, also prompted major policy changes. For example, a key difference between the emerging markets today and what they were in 1997 is their stronger external balances. Exchange-rate pegs, which were common in the mid-1990s disappeared after the crisis and many countries let their currencies float.
According to analysts at Morgan Stanley, although a downward adjustment cycle in Asia has begun since 2013 and will remain painful, a systemic crisis is unlikely because of these policy changes after the last crisis.
“We believe that a more domestic debt profile, presence of persistent disinflationary pressures, current account surpluses, flexible exchange rates, and adequate FX reserves give policymakers in the region better control over liquidity conditions,” analyst Chetan Ahya and his team wrote in a recent report.
