Last week’s warning from the Bank of England’s financial policy committee (FPC) that ‘downside risks’ are increasing in China is one that needs to be taken seriously
Tony Ward is the chief executive of Clayton Euro Risk
Last week’s warning from the Bank of England’s financial policy committee (FPC) that ‘downside risks’ are increasing in China is one that needs to be taken seriously. The bank is certainly heeding its own warning: its decision to stress test British banks to ensure they can withstand a financial crisis emanating from China is a prudent one – and, indeed, a move one could hardly have imagined 10–15 years ago. Things certainly have changed.
I’ve written of my concerns about China a few times in recent months. The FPC’s latest statement notes that it is British banks’ direct exposure to the country’s economy that is the route by which China’s woes could spread to the UK. British asset managers also have extensive investments in China while central bankers worry that a rise in interest rates could trigger disorderly selling – a so-called ‘taper tantrum’ – in bond markets.
China is, without doubt, in the process of a major transition: its economy is growing more slowly, while becoming liberalised and consumption-driven. This transition is made more challenging by underlying vulnerabilities arising from a rapid build-up of debt since the crisis: China’s ratio of credit to GDP has more than doubled since 2008 to 195%. But perhaps the real problem lies not in China itself but the countries whose own economies have become dependent on a healthy export trade with China.
Some commentators point to Chinese consumers as one sticking plaster on the problem. It’s true that sales of cars fell by 3.4% in August, but many other indicators are still pointing in the right direction. A recovery in the Chinese property market has fed through to positive sales for domestic electronics, furniture and some DIY materials. Sales rose by an average of 17% in August compared to the same month in 2014.
This is good news for the Chinese economy, but alas consumer spending power is probably not sufficient to make-up for the large-scale rebalancing taking place within the country’s economy. Nations that have been exporting commodities to China are losing their buyers. A recently-published study by consultants Bain also found that foreign brands are losing market share in China.
While China’s consumers may have just enough spending power to smooth their own country’s way through this difficult economic transition, they may not be able to help its trading partners.
China may escape relatively unscathed. It’s the rest of the world that could pay the price.
