Shadow over China’s growth trajectory – Asia Q1 results

Economic growth unexpectedly slowed to 7.7% in Q1 2013, according to China’s National Bureau of Statistics, casting a dark shadow over the country’s growth trajectory.

Participating economists reported a deteriorating growth environment in China as far back as Q3-2010, when signs emerged of a potential slowdown inside the world’s growth engine.

China’s economic outlook indicator has declined steadily during the past three years, falling by 1.4 points since Q3-2010. China’s economic indicator score of 6.9 hit a five-year low in Q3-2012 and has since failed to recover in Q1 2013 (see graph below).

China’s economic outlook score decline suggests that ECR analysts had expected a growth slowdown of some magnitude into the first half of 2013. Even when growth picked up in Q4-2012, to 7.9% growth, China’s economic indicator remained unchanged.

This is reflected by deteriorating country risk scores for some of the region’s strongest economies: Hong Kong (-0.9), South Korea (-0.9), Malaysia (-1.2) and Singapore (-0.1), all of whom have substantial trade and financial linkages with the economic superpower.

Société Générale estimates in a recent report that the impact on the trade channel from the type of hard landing in China described in the study would be a “cut in GDP growth by around 4.5pp in Taiwan, 2.5pp in South Korea and Malaysia, 1.2pp in Australia, 0.6pp in Japan, 0.3pp in the euro area and 0.2pp in the US”.

The report continues: “For the global economy ex-China, the trade channel effects would bring about a reduction of around 0.7pp to GDP growth.”

Banking stability risks remain a concern to ECR analysts, according to the ECR Q1 results. China’s bank stability indicator remains the sovereign’s weakest economic sub-factor score, according to ECR data, with a score of 5.7 points in Q1-2013.

This means China’s banking sector score is 1.1 points below the East Asian average, reflecting the unresolved core risks on banks’ loan books, against the backdrop of slowing economic growth.

A report by Nomura (China: Rising risks of financial crisis) warns: “China is displaying the same three symptoms that Japan, the US and parts of Europe all showed before suffering financial crises: a rapid build-up of leverage, elevated property prices and a decline in potential growth.”

Analysts participating in ECR’s survey have long highlighted the instabilities inflicting not only China’s banking sectors but across the wider Asian region, a theme picked up by ECR in October 2012 (Anxious times for Asia’s banks despite Singapore’s resilience).

The report notes: “Asia has tracked the eurozone in terms of its increased bank-stability risk and is still regarded as the riskier of the two regions,” with bank-stability risk a particular concern for China, more so than Japan and Taiwan, two similarly rated sovereigns.

The decline in potential growth and the systemic risks stemming from China’s banking sector explains the country’s score decline in the survey this quarter and suggests a growing caution among analysts in funding investment portfolios as reflected by the score decline in China’s access to capital markets indicator.

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