Various industries and companies worldwide have been relying on China markets for growth over the last decade.
China’s economic slowdown will inevitably hurt big exporters like Germany and Japan. Morgan Stanley’s “Fragile Five” now swells to “Troubled Ten”, referring to those with the biggest trading exposure in China.
The surprise renminbi depreciation has weighed on the currencies of the “Troubled Ten”, including the South African rand, Brazilian real, Thai baht, Singapore dollar, Taiwan dollar, South Korean won, Chilean peso, Colombian peso, Russian ruble and Peruvian Nuevo Sol.
All these nations either depend heavily on exports to China or compete with Chinese exporters.
For example, China is the largest export destination for South Korea and South Africa, and accounts for 30 percent and 37 percent of their exports last year.
Exporting nations and developed countries are relying on exports to China. China is the biggest economic powerhouse among the BRICs. The mounting pressure on China’s economic growth is set to ripple across the global economy.
Meanwhile, economic data from the eurozone remains disappointing. The GDP growth rate in eurozone’s three largest economies — Germany, Italy and France — all have lagged behind expectations in the second quarter.
That reflects the bumpy road for economic recovery in Europe. The CPI in the region was 0.2 percent in July, far below the target of 2 percent.
The United States currently represents 22.3 percent of the global GDP, and China’s GDP is about half of that of the US.
Europe’s overall economic size is similar to that of the US, and Japan’s GDP is around one-fourth of that of the US.
The US is still in the early stage of economic recovery. Given its shrinking ratio of global economy, how could the US lead global economic growth again?
The US could slip back to slower growth, dragged by Europe, Japan, China and other emerging economies.
Most are still confident in the US economic recovery, and global capital has been flowing into the US because of the strong the US dollar.
US bonds have become the best safe haven as China’s currency devaluation and falling commodity prices are sparking deflationary pressure worldwide, in particular in the Troubled Ten.
China has kept increasing US bond holdings for four straight months to US$1.27 trillion, close to the historical peak of US$1.317 trillion in 2013.
It is now the biggest holder of US bonds, followed by Japan who holds US$1.197 trillion. China has also ramped up its gold reserve.
In this case, who will be the growth engine for next decade? There is limited upside for growth stemming from population dividend and technology upgrade.
Emerging markets, in particular BRICS, used to be hot spots for investors. China is the world’s largest emerging market, and hence has significant impact on global economic growth. India and Africa have yet to reach the same level.
Global investors are pinning hopes on China’s reform agenda, including liberalizing financial markets, renminbi internationalization, SOE reform, One Belt One Road and the Asia Infrastructure Investment Bank.
If all these reforms progress well, China could continue to spearhead global economic growth for the next 10 years, which would benefit world.
This article appeared in the Hong Kong Economic Journal on Aug. 20.
Translation by Julie Zhu
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