China: Great Wall, Great Mall, Great Fall? Not really

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There is no way around it: the Great China Wall is indeed massive. 

Clichés aside, there is something awe inspiring about the massive fortifications spanning thousands of kilometers. So when we say that we spot a few cracks in the wall, as we did in the Economic Insight report dedicated to China’s economy, we are not making a lighthearted remark. This is serious business, as heavy as a worn out and fragile slab of limestone rock.

Our core scenario for China (60% likelihood) forecats growth rates of +6.8% in 2015 and +6.5% in 2016, costing the world 0.1pp in GDP growth so far.

Lower export growth, decelerating investment, a less favorable financing mix and misperceptions of policy orientation are the underlying causes for this slowdown. The stock market crash was a mere artefact.

Though domestic consumption is set to remain solid, government and central bank support will eventually ramp up and address the remaining instability. Corporate insolvencies will increase by +25% in 2015, and +20% in 2016. Sectors at risk include construction, metals and mining, low-end manufacturing and export related industries.

Overall, the impact on global growth will be limited but dramatically uneven. In the next 6 months, commodity exporters in every corner of the world (e.g. Malaysia, Chile and South Africa) will continue to feel the heat, suffering from lower demand and lower prices. Other countries that are highly dependent on trade and oil and are linked to China’s manufacturing value chain (like Hong Kong Taiwan) will remain at risk.

Alternative scenarios are less likely. 

Euler Hermes Economic Research team estimates that sharper contraction is 30% likely and excessive stimulus only has a likelihood of 10%. All in all, China’s new model is taking shape - but it does not go unnoticed.

We keep an open eye for breaches but also for the ongoing upkeep. The wall, after all, was not built in one day. 

Ludovic Subran

Chief Economist

Euler Hermes

 

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