Fears are rising China's economy could be heading for a crash
Updated Oct 7, 2015 – 2.19pm, first published at 7.53am
Markets are aware that China's exceptional growth rate is finally slackening but economists are increasingly cognisant of the potential for the slowdown to evolve into a crash for the world's second-largest economy.
Concerns are beginning to rise about China's future economic prospects. While the International Monetary Fund chose not to downgrade its economic forecasts for the country's gross domestic product, Citi's chief economist Willem Buiter has said China could drag the rest of the world into a global recession.
"We consider China to be at high and rapidly rising risk of a cyclical hard landing," Mr Buiter and his colleagues said in a report. "The reasons behind China's downturn and likely recession are familiar: rising excess capacity in a growing number of sectors, excessive leverage in the private sector and episodes of irrational exuberance in asset markets.
The slowdown in China is having a dramatic effect on Australia's fortunes. Bloomberg
Deutsche Bank research has joined the ranks, with a new report that analyses the potential for a hard landing and economic crash in the economy that powered much of Australia's mining boom prosperity.
"Market commentary continues to point to uncertainty about the Chinese economy as an important source of negative sentiment. 'Hard landing' fears, it seems, also persuaded the US Federal Reserve not to raise rates last month," chief economist Peter Hooper said.
Mr Hooper said the global investment bank was maintaining its forecast of 7 per cent GDP growth in quarter three but said there was some downside risk, adding a crash was unlikely.
"We interpret the [current economic] evidence as pointing to at worst a gradual decline in growth, such as has been observed over the past couple of years."
Economic stimulus
A significant factor in the growth so far had been a construction boom triggered by the Beijing authorities as an economic stimulus, Mr Hooper said. As this cooled, other industries and in particular the rise of consumer demand would need to increase to maintain China's economic momentum.
"With appropriate reforms, relatively high [albeit slower than in past decades] growth could continue for very many more years," he said.
Rio Tinto has published its latest iron ore export data. Carla Gottgens
Deutsche's research comes as the Commonwealth Bank revises its global growth target from 3.5 per cent 3.1 per cent, well below the recent historic average of 3.7 per cent.
"An extended period of weakness in the large emerging-market economies is the main reason behind the cut to our global growth forecasts," economist Joseph Capurso said, adding China's slowing would exacerbate these declines.
"Economic recovery in China is delayed by continued headwinds in heavy industry, exports and housing investment. There appears to be no quick fix."
The Commonwealth Bank has downgraded its forecast for China's GDP to 6.5 per cent, 0.5 percentage points lower than the emerging superpower's official target.
It has been a volatile year for China's equity markets. Getty Images
Daunting news
A slowing China consumes fewer commodities, which is daunting news for Australia's ailing economy. Mr Capurso said Australia was going through a transition but added he did not expect China to fall into an economic crisis.
"Continued growth in urbanisation, high savings, large FX reserves, an underdeveloped inland economy, the emerging middle class in coastal cities and pent‑up demand for quality services will support economic growth in coming years," he said.
"Our larger concern for China is the political struggles in Beijing that appear to have resulted in partial paralysis among government officials."
A slowing Chinese economy was key to the International Monetary Fund decision in September to downgrade its global GDP forecast from 3.3 to 3.1 per cent in 2015 for emerging markets.
Capital Economics senior world economist Andrew Kenningham said the recent turbulence flowing out of China's equity markets had shown how vulnerable the world was to Chinese investor sentiment but a crash was unlikely.
"If China's economy weakens much further, global growth will slow. Growth of 2 per cent rather than 6 per cent in China would directly reduce world GDP growth by nearly one percentage point," Mr Kenningham said.
"Along with the knock-on effects elsewhere, global growth could fall from around 3.5 per cent to just over 2 per cent for a year or two. Industrial metal producers such as Australia and Chile could be hard hit. But the impact on the major advanced economies, including the US and eurozone, would be much smaller."
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