Is anyone going to benefit from a Chinese slowdown?
After the Grexit, the Chindown. Another sexy term - copyright David Piling from the FT - to describe yet another scary prospect for the World economy: a prolonged economic slowdown in China.
That the biggest emerging market is experiencing weaker growth is hardly in doubt. Last week's inflation figures (at 3 per cent, compared to last year's 6.5 per cent) confirmed that demand is fading fast, with house sales continuously flagging, private sector retreating and government action still hesitant. What's more in question is how pronounced the slowdown will be, how long it will last, and, last but not least, how it will impact the global economy. Will the 'Chindown' be as bad as it sounds (literally) for the rest of the World?
In the wake of the financial crisis, as major Western economies have stalled, emerging markets have provided the world with an alternative source of growth. But China's investment-driven leap forward has been a major driving force behind their rise. The country has been buying commodities on an unprecedented scale: according to the IMF, China's consumption currently accounts for 20 per cent of non-renewable energy resources, 23 per cent of major agricultural crop, and 40 per cent of base metals. Exporters of the stuff have been cashing in on China's appetite, and financed their own consumption, investment, and growth with the proceeds of commodity trade.
A Chindown would call the end of the party. On top of reduced demand from China, commodity exporters will have to deal with lower prices for copper, iron ore, oil, and others. Along with the repatriation of foreign capital caused by Eurozone worries (EM currencies reached an all-time low yesterday), the vanishing Chinese cash will cast a crude light on the skewed growth models of some of the world's largest emerging economies - Brazil and its credit fuelled consumption boom; Russia's reliance on ever higher hydrocarbon prices. Other countries, such as Mongolia and Australia, are also highly exposed. Oil exporters will also be watching the Chinese story closely.
But not all of them need worry too much. The current slowdown has mainly been engineered by Chinese policymakers themselves, and may just be the first step towards a rebalancing of the country's economic model - less reliant on investment and driven by domestic consumption. China will probably not slow down that much, and, in the medium to long term, it will just shift its patterns of consumption towards different products. Not much of a relief for exporters of basic materials, as investment uses much more of these than domestic consumption (except maybe in the auto sector). But for energy exporters, that could change everything. With a fleet of autos still expanding, and hydrocarbon-hungry consumer industries also on the rise, demand for oil will probably continue to increase. Which could mean a brighter future for, say, Russia, Saudi Arabia and Venezuela, than Brazil, Peru or Chile.
The general investor gloom, which a Chindown helps generate, could also have interesting side effects. Brazil and others have long been complaining that strong appreciation of their currency have crippled non-energy sectors, by rendering them uncompetitive relative to their foreign peers. But yesterday EM currencies posted their biggest currency depreciation since at least 1998. That could soften the blow for large exporters, by allowing them to kick-start exports of other stuff. For energy exporters it could also mean more domestic currency in their coffers, as their sales are invoiced in dollars. Both effects are unlikely to offset slowing Chinese demand, or crashing commodity prices: currency depreciation means higher costs for everyone, and is also a symptom of slumping global demand - for commodities as for the rest. But still, they're worth mentioning. In some isolated cases, they could help the economy rebound faster, and may even foster a helpful rebalancing.
Some may even get luckier. As David Piling suggests, some emerging markets might directly benefit from the consequences of a Chinese slowdown. If the Chinese rebalancing really happens, household spending will be on the rise. Whilst 'hard' commodities will suffer, 'soft' commodities, such as wheat and soya beans, might actually do very well - propping up major exporters of agricultural crop. These include Argentina, but also Malaysia and Indonesia, who in recent years have ramped up production of palm oil. Big oil importers might also benefit from softening pressures on the energy markets.
So the picture is more nuanced than it seems. But still. The future of everyone might not rely so much on China as it does on a distinct part of the World - Europe. While the prospect of a Grexit seems to have receded for the immediate future, this week's climbing Spanish yields show us the eurozone is not yet out of the wood. More reasons for emerging markets to prepare for a tumultuous journey ahead - and keep their chin down.