Slowdown comes at 'bad time'

What China's slowing economy means to Africa and the rest of the world

China is slowing and this could prove to be bad for Africa as well as the rest of the world.

The latest set of data released by China's National Bureau of Statistics on Oct 21 showed the economy grew by 7.3 percent in the third quarter, the weakest for 66 months.

Weaker demand from China has already hit the Africa resources sector this year.

The 15 percent slump in the oil price over the past three months has affected Nigeria and Angola, in particular.

Goolam Ballin, chief economist and global head of research for Standard Bank Group, based in Johannesburg, says the major concern would be if growth fell further.

"If China were to grow at 6 percent, while that is nominally still a respectable rate, it would be tantamount to causing a recession in commodities markets. This would have a severe effect on countries like South Africa, Angola, Nigeria and the Democratic Republic of Congo. The resources economies are really at the raw end of China's nerve," he says.

Some, however, believe that Africa is now more resilient and that its own growth is no longer so reliant on a resources-fueled boom.

Michael Power, global strategist at Investec Asset Management, based in Cape Town, says that Africa, although once reliant on demand for its resources from China, India and other emerging economies, now has other growth drivers.

"A lot of Africa is beginning to develop its own internal momentum that is no longer reliant on continued stratospheric growth for commodities," he says.

"Growth is becoming increasingly driven by productivity gains domestically and supported by the demographics of being one of the few parts of the world with a young population."

That is not to say that Chinese economic data will not continue to be of interest in Africa's capitals.

Although some expect a slight rebound in the final quarter, the consensus among economists is that the world's second-largest economy, which is now set to grow at its slowest annual rate for 24 years, is entering a new phase.

Premier Li Keqiang spoke of "positive and profound changes" taking place as the economy makes the transition from being investment-led to one where domestic consumption plays a bigger role.

Consumption contributed 48.5 percent to GDP in the first three quarters, compared to 45.9 percent in the same period last year.

Many economists now expect the government to set a growth target of 7 percent for 2015 at next March's meeting of the National People's Congress, compared to 7.5 percent this year, although this is far from certain.

Until 2012, the target had been held at 8 percent for eight successive years but this was regarded only as a floor below which it would not fall and so was often significantly exceeded.

Ruchir Sharma, head of global macro and emerging markets at investment bank Morgan Stanley, based in New York, and also author of Breakout Nations: In Pursuit of the Next Economic Miracles argues the world is now almost more dependent on China's growth than that of the United States.

According to Morgan Stanley's own analysis, a one-point slowdown in China's growth will now take a half point off global growth.

"When the US sneezes, the world catches a cold; but now it is China's health that matters most," he writes in his Wall Street Journal blog.

Slowing China growth - unless severe - may not have a direct impact on the country's investment in African infrastructure projects, seen as vital to the continent's long-term development.

Chinese private sector investment that has not been impacted by slowing growth is also aiding the process of turning parts of East Africa into a new manufacturing hub.

"Chinese companies are investing in manufacturing facilities, making textiles and shoes in Ethiopia and metal bashing in Kenya. Chinese companies are saying to the Bangladeshis and the Vietnamese that if you are going to undercut us, we are going to undercut you. They are making their products where labor costs are even lower," adds Power at Investec.

It may yet be Europe and not Africa that ultimately bears the brunt of China's slowing growth since it comes at a time when there are both increasing concerns Germany may slip into its third recession since the financial crisis began and heightened worries about a new eurozone crisis.

Louis Kuijs, chief China economist at the Royal Bank of Scotland who is based in Hong Kong, says China's slowdown definitely comes at a problematic time for Europe.

"There is no doubt about that. It is not just the fact that China is slowing but the way that it is slowing which is the key factor," he says.

He says the big concern is slowing fixed asset investment, which is mostly likely to affect exports to China, particularly those of capital goods on which economies like Germany depend.

Two major components of FAI have fallen markedly over the past year: growth in corporate investment has fallen from 19.8 percent in December last year to 13.8 percent in August, according to RBS' analysis of China's NBS figures; and real estate investment growth from 21.2 percent to 10 percent over the same period.

"If you look at the overall economy, the slowing of GDP does not appear to be that drastic but it is where the real story is. It is what is happening to these components of fixed asset investment that is really bad news to countries like Germany," adds Kuijs.

"It has little to do with falling consumption in China, as many seem to think. Consumption in the country is not actually very import intensive. You have only got to look at the shopping baskets in Chinese supermarkets. Even Mercedes cars are by and large made in China," he says.

Zhu Ning, deputy director and professor of finance at the Shanghai Advanced Institute of Finance, believes China is now so integrated into the global economic system, that whatever happens to its economy is headlines everywhere, and that Africa is unlikely to escape.

"China accounts for a quarter of global growth. We have reached a stage where you cannot fully understand the global economy without understanding the Chinese one. Countries around the world have such huge exposure to China, particularly resource exporting countries such as in Africa, Australia and Canada."

Whatever its impact, the story behind the recent China data remains of great interest.

Julian Evans-Pritchard, China economist based in Singapore of the leading independent macroeconomics consultancy Capital Economics, believes the recent data is evidence of a fundamental shift.

"I think what is happening is quite significant. If you look at the crackdown on shadow banking and the passing of budget laws to control local government spending, there has been a real shift in policy. The one disappointing area has been financial reform but you can still see the direction of policy.

"Even if there was to be a rebound in the fourth quarter, I think you can see the way things are going. A lot of the reforms that are going to be needed are going to result in slower growth, at least in the short term."

Zhu at the Shanghai Advanced Institute of Finance wonders whether the government is as relaxed about slowing growth as it may superficially appear.

He believes GDP growth might have slowed in the current quarter as a result of certain stimulus measures, particularly increasing liquidity, not producing a fillip in time.

"The slowing growth could be a result of the policy not working. We might see another run of big stimulus measures to try and make the year's growth target. The government would have to pull a lot of rabbits out of the hat to do this since we would need 7.7 percent in the fourth quarter to make 7.5 percent for the year," he says.

Oliver Barron, head of the Beijing research office of London-based investment bank NSBO, who is based in Beijing, disagrees.

He insists that because employment levels have not been affected, the government has become more relaxed about slowing growth.

Unemployment has remained steady this year at around 4 percent, partly helped by a continued long-term decline in the working population as a result of the country's one-child policy. In the first nine months of the year, more that 10 million jobs were added in urban areas, meeting the full year's target well ahead of time.

"I think policymakers are now OK with slowing growth because employment continues to remain stable, and I think as long as that remains the case the government will be willing to tolerate a further slowdown.

"The National Bureau of Statistics, on their own commentary on the data, said that employment remained a positive surprise. I think this all increases the likelihood of a target of 7 percent being set next year."

Barron also believes that the weak property data also means that there is unlikely to be a rebound in the fourth quarter. Real estate investment rose 12.5 percent in the first three quarters compared with 13.2 percent in the first eight months of last year. Housing sales, however, fell 10.8 percent in the first nine months compared with a year ago.

"I think this is all well set in now and it is unlikely there will be a rebound in the latter half of the year," he says.

Kuijs at Royal Bank of Scotland also senses the situation with the housing market reveals that policymakers are not likely now to come up with some emergency response just to boost growth.

"China is now undergoing its first market-led downturn in the real estate market and there has been no significant policy response. I think if we had something similar five years ago they would have acted. I think from this you get some indication that policymakers are allowing growth to fall below 7.5 percent."

One of the challenges for China if it is trying to engineer a slowdown is whether it can achieve it without sending the rest of the world into recession and then being impacted itself again in rebound effects by the resultant fall in global demand.

Ballin at Standard Bank Group believes this is something Chinese policymakers will be very much aware of.

"There are these risks of a downward spiral. You can't just see this in terms of an isolated GDP growth decline. China is so much now integrated into the global supply chain so there is a synchronicity of risk to any slowdown," he says.

Zhu at the Shanghai Advanced Institute of Finance feels there is less of a risk of this than there was five years ago when, in the wake of the financial crisis, the world was completely reliant on China demand.

"You can't rule out the risk of a downward spiral since China remains so important. What the world needs, however, is a China soft landing rather than a hard one. This relatively stable decline in growth that we are seeing reduces the possibility of a crash, which was what everybody feared.

"We have also moved into a situation where it is not just China contributing to global growth, although it remains very significant, but also the so-called frontier economies of Indonesia, Pakistan and Turkey, which gives greater scope for China to slow without destabilizing the world economy."

andrewmoody@chinadaily.com.cn

(China Daily Africa Weekly 10/31/2014 page14)