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Finance & Economy

The Domino Theory: Asia’s growing China problem


The Domino Theory. Photographer: Peter Parks/AFP/Getty Images

The Domino Theory. Photographer: Peter Parks/AFP/Getty Images

Asia has a China problem. Beijing has just initiated its biggest cut in bank reserve requirements since 2008, a move that underscores just how worried it is about its economy. But the cut is also a stark wake-up call for neighbours that have gotten used to riding China’s boom.

For years, China’s steady growth served as a welcome antidote to an otherwise gloomy global scene. Now even China is sputtering in ways that should worry officials from Seoul to Jakarta.

The People’s Bank of China betrayed a sense of heightened anxiety this week. Normally, the central bank tweaks the amount of cash lenders must set aside as reserves by 50 basis points, at most. Slashing it by 1 percentage point leaves little doubt that, amid a collapse in the price of commodities like iron ore (down 30 percent this year), China is decelerating faster than President Xi Jinping had expected.

What’s more, the contradictory signals coming out of Beijing suggest policy makers are at odds over how to respond. The PBOC’s cut — which will allow banks to add $194 billion of new lending to the economy — came two days after the China Securities and Regulatory Commission clamped down on margin trading to curb froth in the stock market. Even as Beijing has been warning its 1.3 billion people not to bet too heavily on stocks, it has been loosening rules to allow investors to open as many as 20 trading accounts.

That latter policy should be particularly worrying for anyone hoping the Chinese economy will avoid an outright crash. “When a stock market doubles in six months,” quips investor Patrick Chovanec of Silvercrest Asset Management, “you usually take away the punchbowl — not China.”

China’s economic policymakers, who are attempting a managed slowdown on an unprecedented scale, probably feel they lack other options. Since 2008, they had relied on huge infrastructure projects and thriving real estate markets to put a floor under weakening growth. But those sectors are now wildly overcapacity. And that has forced Xi and PBOC chief Zhou Xiaochuan to depend almost entirely on inducing a stock market rally.

Whether that’s a sustainable strategy is another question, of course. Economic policy that’s overly reliant on the stock market, says economist Adam Slater of Oxford Economics, “raises the risk of serious negative feedback effects, for example from bad loans, banking sector problems and a flight of foreign capital.”

What’s clear is that any economic collapse in China would immediately be felt across the continent. China’s $9.2 trillion economy is by far Asia’s biggest — nearly twice the size of Japan’s — and it is the region’s main trading partner.

China’s downshift is already unmasking Asia’s underlying cracks. After a decade of stellar performance the region is expanding no faster than in the early 2000s.  “Risks in emerging markets — half of global GDP — have in our view clearly increased,” says Slater. Now, Slater says, developing-economy growth, excluding China, will be only about 2 percent this year “with risks still to the downside.”

Asia needs a growth plan that relies less on China and more on domestic demand. It’s hard to craft uniform prescriptions for such a large and diverse region, but, at risk of generalising, Asia’s developing economies should start by lowering trade barriers; reducing red tape; attacking corruption; improving infrastructure; and reducing taxes on regionally-made goods to increase exports and, in turn, wages.

“Asia has had an easy ride for many years, initially enjoying the fruits of reforms implemented much earlier and then seeing its run extended by an extraordinary monetary stimulus,” warns HSBC economist Frederic Neumann. “This, however, led to a neglect of further reforms, with easy gains dispelling any sense of urgency to sustain progress with politically painful policy decisions.”

It’s hard to exaggerate how devastating a Chinese crash would be for Asia. Even an orderly deceleration of China’s economy will likely prove a crisis. But perhaps that won’t be a bad thing for a region that has long delayed standing on its own.

Source: Bloomberg – Asia’s Growing China Problem

 

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About Sky In Company

I am Genevieve Cheung, originally from Hong Kong. After completing secondary studies, I moved to Australia where I completed a degree in Bachelor of Business Management at the VUT in Melbourne. After graduation I moved to Italy where I have been living for more than twenty years. My vast cultural background and extensive linguistic knowledge (speak and write fluent English, Mandarin/Cantonese Chinese and Italian), allow me to join our company- SKY IN COMPANY (HK/ITALY). We provide main services such as web-site translations from Italian/ English to Chinese/English, and SEO services for the Chinese search engine "Baidu". Our offices, based in Hong Kong and Italy, have a young and dynamic team with collaborators around the world. Sono Genevieve Cheung, originaria di Hong Kong; dopo aver completato gli studi secondari, mi sono trasferita in Australia, dove ho conseguito una Laurea in Bachelor of Business Management presso la VUT di Melbourne. Dopo la Laurea mi sono trasferita in Italia, dove vivo ormai da più di venti anni. Il mio background culturale e la vasta conoscenza linguistica (parlo e scrivo correntemente l’inglese, il cinese mandarino e l’italiano), mi consentono di partecipare in quest’attività di traduzione in Italiano/English/Cinese. La principale attività della nostra ditta – SKY IN COMPANY (HK), consiste nella traduzione in lingua cinese di siti web italiani, nonché di servizi di tipo SEO rivolti al motore di ricerca cinese “Baidu”. La nostra ditta principale, con base in Hong Kong, dispone di un team giovane e dinamico con collaboratori in tutto il mondo. WWW.SKYINCOMPANY.COM skyinhk74@yahoo.com.hk HONG KONG OFFICE: Flat b 15/F, Block 7 Yee Mei Court, South Horizon, Ap Lei Chau, Hong Kong Island Hong Kong Tel: ++852 92235260 ITALY OFFICE: Via Metastasio 27 Firenze 50124 Italy Tel: ++39-347 1429011

Discussion

3 thoughts on “The Domino Theory: Asia’s growing China problem

  1. Everyone is too reliant on China as a factory for the world.

    Like

    Posted by mikeyb472 | April 27, 2015, 10:04 am

Trackbacks/Pingbacks

  1. Pingback: As old China slows, new China remains closed to foreign firms: ‘The worst time for multinationals’ | China Daily Mail - September 26, 2015

  2. Pingback: What could really disrupt China’s economy? | China Daily Mail - November 13, 2015

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