Markets & Economy
Is China headed for a slowdown?
April 21, 2014
Catherine Gordon: We recently asked Vanguard's chief economist in Europe, Peter Westaway, if China is headed for a slowdown and what impact it might have on other economies around the world. Here's what he had to say.
Peter Westaway: I think it's certainly likely that Chinese growth will be slower than it has been in some of the last few years, where we were seeing rates of growth up above 10% for a while. Now it's round about 7–7½%. That would be the consensus forecast. Some analysts are talking about a so-called hard landing, where Chinese growth could fall to below 5% or maybe even less than that. And that's not an unreasonable possibility. I mean, I think there are two reasons for that.
One is that a lot of the growth in China is being driven by investment, and there's only so much investment that can take place in an economy. So whether we're talking about some of the housing investments, some of the infrastructure spending, when that slows down, as it inevitably will, there needs to be some other type of spending whether it's consumer spending or exports, that will fill the gap. For now, there's a risk that that investment spending will fall too quickly.
The other risk in China is that the financial system just looks like it's very fragile. We've already had a couple of instances of banks or bank-like institutions going bust, the government having to step in and bail them out. And so there are some parallels with the sorts of financial fragility we saw in the West. We may also see that in China, and if that were to happen, it would have big knock-on effects on the rest of China. And from China, because China is so closely integrated with many other emerging markets, it could see a big slowdown in those parts of the world, too.
Now, China is the second largest economy in the world. So, of course, it's going to have an impact on global growth as well. But some of the countries like the U.S., [and those in] Europe, the U.K., the trading they make with China aren't as strong as some other countries. So I don't think the direct links would be so serious. But some of those indirect knock-on effects through emerging markets could also be very serious.
One final point to mention about a slowdown in China is that one potential—what might call it a beneficial—spinoff is that Chinese strong growth has been having an upward impact on commodity prices around the world: oil, metals, and so on. So if China were to slow down sharply we would probably see the corresponding slowdown in commodity price inflation, and that does have some benefits for growth in the rest of the world. But on balance, I don't think we want to see a slowdown in China, and, fingers crossed, we're not going to see it, but there certainly are downside risks that that could come about.
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A quick update on China's economy from Vanguard Chief European Economist Peter Westaway
The pace of China's economic growth has slowed in recent years. Will the slowdown continue? And what impact might it have on the rest of the global economy? Vanguard Chief European Economist Peter Westaway, Ph.D., gives some brief thoughts on the status of China's economy.
Also of interest:
- Is the global recovery on track?
- What's ahead for interest rates?
- Time for optimism in Europe?
- Where are emerging markets headed?
- How to manage "country risk"?
- All investing is subject to risk, including the possible loss of the money you invest.