China's slowdown is here to stay
China's exports are now down 15% since the beginning of the
year. While the downward in imports is somehow less pronounced, it is
nevertheless also significant. Thus while it remains unclear whether the US
economy has reached so-called "escape velocity", and the European
cyclical improvement is likely to be modest only, we should not count on China
as an engine of additional growth.
Likenomics explained
Like his Japanese counterpart Abe, Li Keqiang has also three
arrows:
1) no stimulus;
2) de-leveraging;
3) structural reforms.
Given the massive expansion of credit over the last years,
and manifold signals of bubbles in the housing sector and over-investments in
manufacturing, these arrows are absolutely justified. During the last US-China
Strategic and Economic Dialogue in Washington, finance minister Lou Jiwei
hinted at a downward revision of 2013 growth from 7.5% to 7%. Such revision of
an official target is unusual and might reveal more downward pressure than the
markets have so far internalised.
Global implications
Implications are probably more important for emerging
markets than for advanced economies (although it is an additional reason for
Bernanke to go slow on QE tapering and a potential source of concern for
Germany's capital goods and car exporters). Commodity exporting emerging
markets with current account deficits are more at risk. Energy producing
emerging markets should be more resilient. Asian countries that export
intermediate manufacturing goods to China should resist even better and could
actually, over time, profit from the development of a more significant domestic
market in China.
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