The Dragon Economy slows - Implications for the UK & the world economy

Marcus Wright RBS Economics August 2015

China’s slowdown has been on the cards for a while

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1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 3120%

30%

40%

50%Investment as a share of national income (%)

China (1996-2013)

Japan (1955-1985)

S. Korea (1976-2006)

Years

Source: Macrobond

China’s economic growth has been unprecedented in scale & duration. But this well trodden path of investment-based growth has been seen before. China’s issue is it looks to have gone too far.

1. Downward pressure on growth

2. Depressed rates of world trade growth

The China checklist – what’s happening?

5. Strained financial links to China

4. Global interest rates likely lower for longer

3. Downward pressure on inflation

?6. An all-out credit crunch in China

?

China’s growth is slowing fast, however you measure it

4Source: Bloomberg, Macrobond, RBS Economics

1997 2000 2003 2006 2009 2012 20150

5

10

15

20

GDP Growth Proxy - Y/Y ChangeGDP Y/Y Change

China appears to be slowing more than the headline figures suggest. The growth prospects of commodity producing countries & other emerging markets with close ties to China have been damaged.

A big reason why world trade is so bad right now

5

1995 1998 2001 2004 2007 2010 2013-30%

-20%

-10%

0%

10%

20%

30%

40%Emerging Asia Import Volume

(% Y/Y Change)

Asian Financial Crisis

Post-Tech Bubble Slowdown Global Finan-

cial Crisis

China induced slowdown?

Source: Netherlands CPB

Yuan devaluation - the cherry on the disinflationary sundae

6Source: Macrobond, BIS

• Yuan devaluation has grabbed the headlines recently. But it is not yet the big story.

• China has been exporting disinflation for a while now. And it is becoming more and more of an influence on world prices.

China

Brazil

India

Malaysia

South Africa

-30 50

Emerging Market Currencies

Increasingly 'under-valued'

Increasingly 'over-valued'

1971-85 1986-98 1999-20130

20406080

Causes of Inflation Variability in Advanced Economies (%)

Common factor Chinese export prices

Global interest rates lower for longer

7

Turkey (Jan-14)Denmark (Apr-11)Eurozone (Apr-11)

N. Zealand (Jun-10)N.Zealand (Mar-14)

Sweden (Jul-10)Chile (Jun-10)

Hungary (Nov-10)Poland (Jan-11)

Korea (Jul-10)Australia (Oct-09)

Israel (Aug-09)Norway (Nov-09)

Iceland (Sep-11)Canada (Jun-10)

477

915

1719

2122

24252526

3855

Number of months from 1st rate hike to first rate cut

All of these OECD central banks have raised rates since the financial crisis. All have had to lower them again.

Source: Bloomberg, Macrobond

Greece has grabbed all the headlines. It shouldn’t.

8

2005 2007 2009 2011 2013 -

500

1,000 Global Banking Sector Exposure

to Greece and China ($ Bn)

GreeceChina

Source: BIS, Macrobond

China

US

Ireland

Spain

-100% 0% 100% 200% 300% 400%

Change in UK financial sector exposure

(2009 - 2015)• While the UK has

decreased its financial exposure to most countries since the crisis, loans to China have sky-rocketed.

• The world’s attention has been focussed on Greece. But the world’s banking sector is 17 times more exposed to China. And that is before we count exposure to Hong Kong.

An impending credit crunch?

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China’s banking sector is sitting on problem loans far in excess of official figures. Other countries’ experiences suggests it could be in for something worse than a slowdown.

Indon. - 1997

US - 2009

Japan - 1992

S. Korea - 1997

UK - 2009

Sweden - 1990

China - 2014

Thailand - 1997

Ire - 2007

0%

40%

80%

120%

24% 32%42% 42%

52%60%

82%

104% 105%Rise in private sector credit as % of GDP in the six years to.....

Source: Macrobond, IMF

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