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Business News/ News / World/  China hard landing war-gamed for world economy
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China hard landing war-gamed for world economy

Societe Generale forecasts Chinese growth of less than 7% this year, below the 7.5% targeted by government

Chinese growth wouldn’t have to slow all the way to 2% to become a problem for developed markets, according to equity strategists at Credit Suisse Group AG in a 5 February report. Photo: Bloomberg Premium
Chinese growth wouldn’t have to slow all the way to 2% to become a problem for developed markets, according to equity strategists at Credit Suisse Group AG in a 5 February report. Photo: Bloomberg

London: A hard landing in China would hobble global growth and buoy the dollar, says Societe Generale SA in a study that war-games the international implications of a steep decline in China’s expansion.

A plunge to 2% from more than 10% in 2010 would be enough to slash 1.5 percentage points from worldwide economic growth in the first year as China’s troubles are transmitted through trade, banking and financial market channels, the French bank said in a 11 February report.

Among the reasons to expect such reverberations from what the authors called the worst reasonable case: China’s imports are equivalent to 30% of its gross domestic product. Asian and commodity-producing nations would be the hardest hit, according to Michala Marcussen, global head of economics research in London.

The impact could be aggravated by China’s bias toward investment, which accounts for half of its GDP. Less worrisome is the risk of China hurting the world through banks, given that total foreign claims of banks on the country are just 3.2% of the total, according to data from the Bank for International Settlements cited in the report.

Some multinational companies would be hurt by their exposure and the dollar would also rise 10% against the yuan in the first year, according to Societe Generale.

At the same time, a 30% drop in the price of oil as China slowed would aid growth elsewhere, as would an easing of monetary policy by foreign central banks, said Marcussen.

Chinese growth wouldn’t have to slow all the way to 2% to become a problem for developed markets, according to equity strategists at Credit Suisse Group AG in a 5 February report.

They say growth of 5% would be enough to start hurting, although they note such a slump is unlikely given that government debt of 80% of GDP gives China’s leaders scope to respond.

Worrisome elements include the third biggest bubble in private sector credit of recent decades and a real estate construction sector equivalent to 20% of GDP. Still, even if Chinese growth fades to 6% and US expansion to 2%, the world could still grow almost 3% this year, they said.

Societe Generale forecasts Chinese growth of less than 7% this year, below the 7.5% targeted by the government and anticipated by the International Monetary Fund (IMF) . Bloomberg

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Published: 14 Feb 2014, 10:01 AM IST
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