In one of his more exuberant poems – at least at the outset – W. H. Auden recounts overhearing a lover’s declaration to “love you till China and Africa meet.” Well, now they have, if not quite in the sense the lover envisaged.
In recent years, China has been widely regarded as the engine that would drive economic recovery elsewhere. In Africa, this has been through its appetite for primary resources. In Europe and the Americas, China has been viewed both as a market for processed goods and as a source of investment, whether directly or via sovereign debt.
China is perhaps no longer seen as needing to do all the heavy lifting. The Organisation for Economic Co-operation and Development’s latest Economic Outlook foresees a strengthening of the global economy over the next two years, while cautioning that urgent action is still required to reduce unemployment and address other legacies of the crisis. “Advanced economies are gaining momentum and driving the pick-up in global growth, while once-stalled cylinders of the economic engine, like investment and trade, are starting to fire again,” said OECD Secretary-General Angel Gurría, launching the Outlook at the Organisation’s annual Ministerial Council Meeting and Forum in Paris in May.
GDP growth across the 34-member OECD is projected to accelerate to 2.2% in 2014 and 2.8% in 2015. The world economy is forecast to grow by 3.4% in 2014 and 3.9% in 2015. Among advanced economies, the recovery is judged strongest in the United States, which is expected to grow by 2.6% in 2014 and 3.5% in 2015. The euro area is projected to return to positive growth after three years of contraction, while Japan’s growth is expected to be constrained by the launch of long-needed fiscal consolidation measures, hovering at around 1.2% in both 2014 and 2015.
The BRIICS economies (Brazil, China, India, Indonesia, Russia and South Africa) are projected to see average GDP growth of 5.3% in 2014 and 5.7% in 2015. China is again expected to be the fastest-growing among them, with growth just below 7.5% in both years. While enviable by global standards, the Chinese government remains mindful of overheating risks. According to the World Bank, recent growth has been materially lower than over the past decade as the economy transitions from manufacturing to services on the supply side, and from investment to consumption on the demand side, alongside efforts to rein in rapid credit expansion.
According to John Vail, Head of Global Investment Strategy at Nikko Asset Management, the priority for China is to continue building its service sector and reduce reliance on exports, lest it fall into the mercantilist trap experienced by Japan, where sustained trade surpluses led to an over-strong yen. While fears of a hard landing are overstated, he argues, the transition is unlikely to be smooth.
“The rest of the world has believed that China can do no wrong because it has done no wrong for the last 20 years,” says Crispin Odey, founder and CEO of Odey Asset Management. When the Chinese economy encounters turbulence, he anticipates significant global nervousness. The size of China’s shadow-banking sector, he believes, is evidence that attractive returns are increasingly difficult to find in the mainstream market. “Hidden dangers lurk behind attractively high yields,” he warns.
If China itself is not widely viewed as a prudent destination for investment, it follows that many domestic investors may feel the same. The Shanghai Composite Index fell by 8.5% in 2013 and has continued to decline this year. Capital that might previously have flowed into property – and is uncomfortable with higher-risk domestic alternatives to listed markets – will need to find new outlets.
**A view from Washington**
The International Monetary Fund, in its 2014 assessment of the Chinese economy, struck a cautiously optimistic tone. It advised China to adopt lower growth targets and focus more intently on implementing reforms announced in November 2013. “Slower growth now will lead to higher, sustainable growth later,” it argued, warning that failure to enact reforms could result in a sharp downturn. The IMF also described the renminbi as “moderately undervalued”, flagged vulnerabilities in the real estate sector and warned of a credit bubble that, if mismanaged, could have severe consequences.
Not all countries, however, are seeking closer economic integration with China. The Trans-Pacific Partnership (TPP) trade agreement, negotiations for which are expected to conclude by the end of the year, excludes China. Its Asian participants include Singapore, New Zealand, Brunei, Australia, Japan, Malaysia and Vietnam. China is not involved, as accession requires unanimous invitation by existing negotiating members – an invitation that is not currently anticipated.
