When the engine that has powered global growth since the turn of the century begins to creak and groan, it’s time for all of us to worry.
The latest sign of China’s problems came in the form of an 8.5 per cent slide in the Shanghai Stock Exchange Composite Index on Monday. It was the second-worst day in the benchmark’s history and its most severe beating since 2007.
The stock-market rout reflects many things, but among them is growing evidence that the outlook for China’s economy is deteriorating. The slowdown is already being transmitted around the world in the form of plunging commodity prices, which hit particularly hard at resource-producing nations like Canada.
But the apparent end to China’s great growth spurt is also being felt beyond mines and oil fields. For more than a decade, the Asian giant was the single biggest driver of the global economy as it expanded at a double-digit clip. It contributed, on average, about 27 per cent of world growth each year since 2000 – far more than the 16 per cent contributed by the United Sates and the euro area put together, according to Toronto-Dominion Bank.
Without a vigorous China, it’s difficult to imagine a strong global recovery – and right now the outlook for the Middle Kingdom is growing increasingly uncertain. Here are a few of its major stress points.
The Shanghai Composite Index has gone from shooting star to cowering dog in the space of two months. After more than doubling since the summer of 2014, it hit the skids in early June and tumbled more than 30 per cent in three weeks.
The government responded to the June decline by introducing strong-arm manoeuvres designed to muscle the market doubters back in line. Limits on insider selling and a ban on short selling combined with large amounts of share purchases by state-owned funds helped push the index back up, but Monday’s fresh selloff signals that investors aren’t sure how long the government will decide to keep its support in place or how successful the rescue operation will be.
To be sure, optimists can argue that the plunge is just a natural adjustment to the earlier exuberance. Even after the new losses on Monday, the Shanghai index was still up about 15 per cent since the start of the year.
However, the selloff underlines the fact that there are a lot of nervous investors who seem eager to dump their holdings if given a chance. There was no obvious trigger for the decline other than general skepticism.
“We haven’t a clue what truly motivated such a large rush to the exits overnight but when you find out, let us know,” wrote Bank of Nova Scotia economists in a research note on Monday.
Property and credit concerns
Li Gan, an economics professor at Texas A&M University who heads the China Household Finance Survey, told Bloomberg that winners from the stock boom are cashing in to buy real estate. If so, that may explain some of the recent volatility on the Shanghai composite. But it also means yet another manic chapter in China’s wild property saga.
“Like a bouncy castle on a patchy power supply, the Chinese property bubble has been rapidly inflating, deflating and re-inflating since 2007,” writes Gwynn Guilford, the resident China watcher at online magazine Quartz. She predicts that abundant credit will fuel yet another upswing in the market – good news for Chinese banks given that as much as three-fifths of credit in China is secured with property as collateral.
However, another real-estate boomlet, with all the borrowing that would imply, would just add to the concerns about China’s massive debt overhang.
Non-financial sector debt has surged from 156 per cent of gross domestic product in 2008 to roughly 250 per cent at the end of 2014. “The rapid pace of credit accumulation raises financial stability concerns,” Andrew Labelle, a Toronto-Dominion Bank economist, wrote in a report last week.
The Bank for International Settlements, which works to promote financial stability around the world, uses various measures of indebtedness to gauge the risk of future banking crises. Both of its favourite gauges say China is financially vulnerable and has an urgent need to reduce its debt levels. “Yet, even with credit growth decelerating, it continues to rise faster than GDP,” Mr. Labelle says.
Weak growth indicators
China reported that its economic growth slowed in the first quarter to 7 per cent, its slowest pace since the financial crisis. But many observers think even that figure is inflated.
“There is completely independent data that indicate the Chinese economy is much weaker than official data,” writes Christopher Balding, an associate professor in the HSBC Business School at Peking University.
For instance, electricity consumption is growing at only 1.1 per cent while imports are declining at a 15 per cent annual clip. Neither figure seems consistent with an economy that is supposed to be growing at a 7 per cent pace.
The so-called Keqiang index devised by the Economist magazine uses three indicators – electricity consumption, freight volumes and bank loans – to gauge Chinese economic growth. It suggests that Chinese growth slowed abruptly in 2013 and has recovered to only about a 5 per cent pace.
A broader measure devised by TD Economics also concludes that real GDP declined by more than the official figures in the first quarter of this year and has managed only a modest rebound since then.
Chinese factories have been especially hard hit. A purchasing manager’s index for the manufacturing sector fell last week to its lowest level in 15 months. For the fifth month in a row, it indicated that the factory sector was shrinking.
China ran a record balance-of-payments deficit in the first three months of this year, as the equivalent of $79-billion (U.S.) flowed out of the country, according to official data. Chinese businesses and investors appear to be voting with their feet and moving money to more attractive locations elsewhere.
The capital flows signal growing skepticism about China’s economy, although it should be noted that the overall amount remains small in comparison to the overall size of the country’s production.
Still, the balance-of-payments deficit was striking since China ran its largest trade surplus in five years during the quarter. Yet that wasn’t enough to outweigh the flood of money headed out of the country.
What does it mean for Canada?
China’s endless appetite for resources fuelled the commodity supercycle of a few years past. Resource-producing countries like Canada and Australia were among the prime beneficiaries as prices for gold, iron ore, copper and oil all climbed to lofty heights.
Now that process is going in reverse. The Bloomberg Commodity Spot Index has sunk to its lowest level since 2002 – bad news for Canadian miners and energy producers.
Without strong growth in the United States or Europe, the fear is that a slowing China may put the brakes on an already disappointing global recovery. “For the rest of the world, the implications are that China will continue to periodically drain demand from an already demand-short global economy,” Mr. Labelle says.