Over 8 years have passed since the start of the global financial crisis. This began with the so called ‘credit crunch’ in August 2007. More recently, those well-worn terms ‘credit crunch’ and ‘financial crisis’ have returned to the headlines of the financial media. While the last crisis was born in the USA, the land of the sub-prime mortgage, the next one could well be made in China.
China has never had a financial crisis
Financial crises are not that rare. Since the 1970s, there have been 217 currency crises, 147 banking crises, and 67 debt crises. These have included crises in the Far East, in Europe, in the US, South America and elsewhere. One country that has never experienced a financial crisis though is China. But could that be about to change?
Not ‘if’, but ‘how big’
According to China expert Linda Yeuh, who was speaking at last weekend’s Kilkenomics festival at Kilkenny, the question isn’t ‘if’ China will have a financial crisis but rather ‘how big’ will it be?
So, should we in the Western world worry? After all, Asian financial crises are not new and the last one in 1997/98 didn’t have a major impact on us (although it did wreak havoc in Asia).
It is worth pointing out that back then the so called Emerging Economies (in Asia, South America & Africa) accounted for 42 percent of world GDP with the Developed Economies (e.g Western Europe & North America) making up 58 percent.
Developed world now much more exposed to China
Fast forward to 2015 and those ratios have been reversed. Incidentally at the time of the global financial crisis, the developed economies and emerging economies’ share of world GDP was broadly the same. That means that the developed world is now much more exposed to economic and financial developments in emerging economies such as China than ever before. Therefore an emerging markets economic slowdown or financial crisis has the potential to do a lot of economic damage to global growth.
China was instrumental in getting the global economy out of recession in 2009. China and the emerging economies in Asian and South America engaged in the heavy lifting required for the global economic recovery. Unlike the developed world, China had very low levels of public sector debt and it was well placed to embark upon a massive fiscal stimulus and an investment boom of Klondike proportions.
China the biggest manufacturer and exporter on earth
China’s influence on the world economy has changed markedly over the last 10-15 years and since the last global financial crisis. A decade ago China and the US both contributed equivalent shares of global GDP (16% each). Now China (29%) makes almost double the contribution to global growth that the US makes (15%). Over the five-year period from 2007-2012, China accounted for half of all global economic growth. Meanwhile emerging economies have accounted for 70 percent of global economic growth each year since the crisis.
China is the biggest manufacturer and exporter on earth and the primary source of demand for raw materials. For example, China accounts for half of global metal consumption. The latter has seen Chinese trade with Africa increase tenfold since 2000. There are more iPhones sold in China than the US, and China accounts for 30 percent of the global car sales market (Europe 25%, US 12%). It is noted that 3½ times as many countries now have China as their top export partner as was the case when Lehman Brothers collapsed (Sept-2008). China is also a key source of FDI with Chinese companies acquiring a number of household names such as Weetabix and Volvo in recent years.
Concern about emerging markets slowdown
In recent months, however, there has been increasing concern about an emerging markets economic slowdown (China in particular) and how this will impact on economies elsewhere. China’s economic slowdown has been transmitting across other emerging markets with the current rates of decline in world trade normally associated with a global recession.
The slowing Chinese economy is therefore pulling other economies down with it as its previously-voracious appetite for commodities wanes. This has been evident recently with China dumping its oversupply of steel on world markets at cheap prices.
NI quarrying and mining companies exposed to China
Economies exposed to commodities and Chinese trade are particularly vulnerable. This includes Northern Ireland which manufactures equipment for the quarrying and mining industries. Remember a frequent boast within Northern Ireland is that 40 percent of the world’s mobile crushing and screening equipment (mining & quarrying industries) is made here. Therefore, while China accounts for only 1.5 percent (£94m) of Northern Ireland’s manufacturing exports, the indirect exposure to a Chinese economic slowdown is much greater.
An economic slowdown has been on the cards for quite some time, as China’s economic growth has been unprecedented in both scale and duration. However, this well-trodden path of investment-based growth has been seen before (e.g. in Japan & South Korea). China’s issue is that it looks to have gone too far and it started to rebalance to household consumption too late.
China fits financial crisis pattern
Financial crises are normally preceded by a period of private sector credit expansion. China fits this pattern. No country that has witnessed the expansion in credit that China has already seen has avoided a financial crisis. China’s credit boom also occurred within China’s unique political environment. Corruption is rife and lending followed political criteria not economic or financial. Therefore China’s banking sector is likely to be sitting on non-performing loans well in excess of official estimates.
China has plenty of firepower to deal with a crisis but the policy response will be critical.
This is an extended version of an article that appeared in the Irish News’s Business Insight section on 10th November, 2015.