Is China's economy headed for a hard landing
China saved our economic bacon in the GFC, but there are concerns it could be Australia's undoing in the next financial meltdown.
The first wave of the global financial crisis began with the collapse of Lehman Brothers in 2008.
The second wave, the eurozone crisis, rolled across the global economy when Greece threatened to default on its euro-denominated sovereign debt.
Australia surfed through these tidal surges. But for China, we would have taken a nasty dumping.
China addressed the Lehman and Greek threats with massive monetary stimulus, mainly in the form of expanded credit mediated by the formal banking system and a shadow banking system that has bubbled up into a multi-trillion dollar monetary force in the space of five years.
Now concern is growing that a third wave is building and this time we could be dragged down by China; not saved. Bank of AmericaMerrill Lynch has been running a monthly survey of fund managers asking them what they fear as potentially being the biggest economic risks they could confront.
The proportion of managers who nominated an economic hard landing in China that triggered a collapse in commodity prices stood at 26 per cent in December, 37 per cent in January and 46 per cent in February.
Financial markets, especially those exposed to emerging markets (EM), have been pretty volatile through the past three months, so the rising concern of the fund managers about China is not simply a default reading.
China is itself an emerging market with one crucial difference, its size. China's gross domestic product (GDP) is as large as the combined total of six of the largest EMs: Brazil, Russia, India, South Africa, Mexico and Indonesia. China is the EM that matters.
There are any number of statistics which can be quoted to illustrate the importance of China to the global economy. For Australia, the most important is that China accounts for 28 per cent of our export income.
What worries financial markets most, but not solely, about China is what brought Lehmans and Greece unstuck – debt.
From year-end 2008 through the third quarter of 2013, assets on the balance sheets of Chinese banks grew by $US15.1 trillion to $US24.3 trillion – an unprecedented expansion of credit anywhere, anytime.
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