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All Contents © 2017The Kiplinger Washington Editors
By The Kiplinger Washington Editors
| August 2015
Does a falling currency signal that China’s economy is in trouble? Possibly. China’s long era of torrid GDP growth is clearly coming to an end. What isn’t known: Whether the slowdown will be gradual enough not to disrupt the global economy, which has long relied on China for growth, or abrupt and a threat to world markets.
We at Kiplinger think that the Chinese economy will sputter more but won’t flame out. Beijing’s official growth rate of 7% is almost certainly inflated to keep up appearances. Construction and manufacturing—key components of Chinese growth—are slowing. But the government still has trillions of dollars available to gin up infrastructure work and other projects to avoid a steep drop in activity, and it’s willing to spend the money.
Here are six reasons not to fear a China economic slowdown:
U.S. exports of goods and services to China are expected to decline by 5% this year compared with 2014. While important to those firms that sell to China, this represents less than 0.1% of U.S. GDP.
U.S. banks have loaned $100 billion to Chinese firms, but this is less than 1% of the banks’ $15 trillion in assets.
U.S. firms have invested $66 billion in Chinese operations, but this is only 1% of their total investment abroad of $6 trillion.
Cheaper Chinese imports will help keep U.S. inflation at its current, moderate pace.
Will the Federal Reserve still raise short-term rates this fall? Odds are it will. The Fed wants to end the era of 0% rates and is eyeing a quarter-point hike in September. But the prospect of milder inflation for longer should help delay the push to raise rates quickly.
No matter what the Fed decides to do with short-term rates, long-term rates won’t rise very much. A weaker global economy will keep a lid on Treasury bond yields and mortgage rates, and give borrowers a chance to nab friendlier terms on all sorts of loans.
Why didn’t the 28% swoon earlier this summer in China’s stock market, after a startling 113% increase in stock prices since last November, have more of a global impact? Because China’s market is relatively tiny compared with those of the U.S. and Japan. Most Chinese citizens keep their money in the bank rather than in the stock market, and the banks, which finance much of the economy, are owned by the government.
Is a volatile Chinese stock market evidence that China’s shift to a consumer-driven economy is failing? Not at all. An expected dip in growth has already started and will continue. Market weakness will hasten that decline, but only a bit: For 2015, Kiplinger forecasts 6.5% growth for China instead of 6.9%. We see only a minimal tick down for global growth this year, from 3.1% to 3%. And no change at all in the U.S.: We still see 2.5% growth for the full year.
Commodities will bear the brunt of China’s slowdown. Prices of oil, copper, iron ore and other raw materials rose in recent years as Chinese demand soared. Now prices are at multiyear lows and won’t recover much until 2016 at the earliest. Domestic oil and gas prices will remain depressed as well. That’s good news for U.S. consumers but could produce disappointing earnings for investors in big oil stocks and in makers of energy extraction equipment.
Some big U.S. multinationals will face pressure, too. Apple, Ford and Procter & Gamble, for example, are heavily invested in China. But U.S. markets overall will barely blink. Bottom line: Some bumps ahead, but no need to change your business plans.
Home prices are up in China’s largest cities and are starting to show modest improvement elsewhere.
Despite tough times, China was never headed for a U.S.-style housing bust. Mortgages are much tougher to get in China, and down payments are typically 30%. Residential mortgages aren’t as big a factor in the banking system--just 6% of financial system assets, compared with 18% in the U.S. during the housing boom. And because mortgage loans aren’t securitized and sold to investors in China, its financial sector isn’t especially vulnerable to a housing meltdown.
What about the rows of empty buildings in so-called ghost cities everyone has heard so much about? Think of them as a party before the guests arrive. In China, developers don’t add to existing cities or fill in empty spaces within them. They start from scratch in new cities, building infrastructure and thousands of units at once, many of them presold. 75% of private housing sales are of unfinished houses. No one wants to move in first, so the government often gets the ball rolling by relocating government-controlled banks, agencies and universities to new cities.
What does the yuan’s devaluation mean for the Trans-Pacific Partnership, the proposed U.S. trade deal with Asian countries that China might one day join? Opposition in Congress will ratchet up, but not enough to torpedo a deal. Critics will insist that any agreement include language barring currency devaluations that could give one country an export edge. China’s decision to devalue the yuan has stoked fears that other countries could follow suit to boost their exports. But Japan and other signatories won’t accept any binding penalties for such policies. Congress won’t vote on the TPP before December, when currency markets should be calmer.
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