ChinaAug 18 2017

Escape forecast for UK on China despite IMF warning

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Escape forecast for UK on China despite IMF warning

Calming notes are coming from market watchers about the impact on the UK of China's debt bubble bursting, after a stark warning from the International Monetary Fund about the underlying economy of the Asian giant.

This week the IMF warned China is taking on significant extra debt to meet short-term growth targets rather than long-term economic development. Total debt in China has quadrupled since the financial crisis ten years ago.

Mike Jakeman, global analyst at the Economist Intelligence Unit said: “The health of the Chinese economy remains the biggest risk to the global economy.”

He said the Chinese economy grew by 6.7 per cent in 2016 despite “recessionary” conditions” in the industrial north-east of the country.

“The build-up in debt, particularly in the corporate sector, is unsustainable, and we think that once the president, Xi Jinping, has consolidated his power at a party conference in late 2017, he will sanction policies to rein in credit growth," Mr Jakeman said.

"As a result of these policies, we forecast that growth will slow sharply in 2018, to 4.8 per cent.”

He predicted firms in the construction and real-estate sectors will be hardest hit.

But while Mr Jakeman acknowledged the impact of China’s economic slowdown will be felt around the world, it will be relatively benign for the UK, he said.

Worst affected will be commodity exporting countries who sell to China, including Australia, Chile, and South Korea, he said.

He said China would avoid the sort of systematic crisis that impacted Japan in the 1980s because the state involvement in the banking system will prevent banks from going bust, preventing a systemic crisis.

The IMF actually increased its growth forecast for the Chinese economy this year, to 6.7 per cent, from the previous 6.2 per cent. 

Market participants are often wary of investing in an emerging economy when  US interest rates are rising.

This is because in the past emerging market companies and countries have funded their borrowing in dollars, so a rising dollar, caused by rising interest rates, has a negative impact.

A stronger dollar is also negative for many emerging markets because commodities are priced in dollars, so a stronger dollar makes those products, which are in many cases exported from emerging markets, more expensive, hitting demand.   

Jason Hollands, managing director of communications at investment adviser and platform Tilney, said he advocated shunning investing in China at the start of 2016, but he has since changed his mind, noting the weakness of the dollar.

He said the debt problem is real, but not a consideration for the short term.