China Fears

Losing the Golden Goose

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The German stock index was down 2.6 percent on Thursday at midday in Berlin on China worries after the world's second-largest economy unexpectedly devalued its currency, the renminbi.
  • Why it matters

    Why it matters

    An economic slump in a whole range of developing countries, including China, Russia and Brazil, represents the biggest challenge to the world economy in 2016.

  • Facts

    Facts

    • Germany’s DAX index fell below the 10,000 mark Thursday for the first time in over three months on renewed fears over China’s growth prospects.
    • The World Bank cut its forecasts for global economic growth to 2.9 percent this year, down 0.4 percentage points from its June forecast.
    • A sharper-than-expected decline in emerging markets poses the biggest risk to the global economy this year, the World Bank warned.
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For global markets, 2016 started with a thud, and few have felt it harder than Germany’s blue-chip DAX Index.

After global stocks plunged to start the year on Monday, stocks tumbled in Europe again Thursday morning following a surprise Chinese currency devaluation, which intensified worries the engine of global economic growth may be slowing.

By late afternoon in Europe, Germany’s blue-chip DAX had recovered some of its losses, and was down 2.1 percent at 5:30 p.m. in Frankfurt. The recovery came after Chinese trading exchange authorities announced they were suspending use of an electronic brake that had led to two abrupt halts in trading in China this week.

The use of the trading brake, which is new this year in China, had been questioned by western investors because it shuts down trading for a complete day after just a 7 percent decline. Such a drastic move would only be initiated in New York, for example, after a 20-percent plunge, according to Bloomberg.

But even after the technical adjustment in Shanghai, investors must still confront the possibility of slower growth in China, which has raised fears of a global slowdown. The Washington-based World Bank cut its global economic growth forecasts on Wednesday, saying an anemic recovery in a whole range of emerging markets could hinder developed economies too.

Brazil and Russia went into deep recessions in 2015 and the World Bank warned that these two economic powers, while recovering slightly, will remain in recession this year. A number of Middle-Eastern and South American countries that rely on exporting commodities can expect another rough year as crude oil prices tumbled again this week to an 11-year low of less than $35 dollars a barrel.

“Financial markets tend to be very sensitive to all news out of China…but there is more than one emerging market that is slowing,” Franziska Ohnsorge, a World Bank economist and lead author of its annual economic outlook, told Handelsblatt Global Edition.

Few stock indices have been more affected than Germany’s DAX. After a 4.3 percent drop on Monday – the worst start to a year in a quarter-decade – the index of Germany’s 30 largest companies slid throughout the week.

The German index lost fell as much as 3.6 percent in morning trading, falling below the 10,000 mark for the first time in three and a half months. By the afternoon, the index had quietly climbed back above the 10,000 mark, trading at 10,002.15 at 17:30 local Frankfurt time.

Still, combined with losses earlier this week, the index has erased nearly all the gains made in 2015.

“2016 will be a test of the resilience of emerging markets as a group.”

Franziska Ohnsorge, World Bank economist

Carmakers BMW and Volkswagen led the list of decliners, dropping more than 5 percent. The companies had benefited from booming growth in China.

Germany’s export-dependent economy is especially sensitive to a Chinese slowdown. The DAX has declined far more sharply than other European indexes this year. On Thursday, London’s FTSE 100 blue chip index fell 1 percent; in Paris, the CAC40 lost 1.3 percent, while the Swiss SMI index dropped 3.2 percent.

The European declines followed drops in Asia and on Wall Street, where the Dow Jones Industrial Average lost 1.5 percent and the S&P 500 fell 1.3 percent.

Despite the market unrest, most analysts this week argued that China’s economy is not nearly as unhealthy as investors fear. The World Bank warns that China isn’t the only major emerging-market player that could dampen investor sentiment this year.

This is a surprisingly unique risk. Ms. Ohnsorge of the World Bank pointed out that a combined collapse of all major developing countries, at the same time, is nearly unprecedented, and could have a major impact on the global economy.

“That is really the key risk that we see for 2016,” she told Handelsblatt Global Edition. “2016 will be a test of the resilience of emerging markets as a group.”

The Washington-based World Bank, which keeps a close eye on developing countries, still expected the global economy to pick up slightly next year – it predicts global growth of 2.9 percent, up from 2.4 percent in 2015 – but that is 0.4 percentage points lower than its forecasts from just six months ago.

Developing countries as a group are expected to grow 4.8 percent this year, up slightly from 4.3 percent in 2015 but a massive 0.6 percentage points lower than what the World Bank predicted just six months ago.

The biggest risk is that emerging markets, as a group, could slow down even faster than the World Bank expects. That could have a major impact on global trade – affecting major exporting countries like Germany in the process.

By contrast, the World Bank is actually less worried about China itself. It expects growth to slow slightly in the Asian powerhouse, to 6.7 percent this year from 6.9 percent in 2015, but sees only a “low-probability risk” that the economy will weaken further.

 

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China’s government has plenty tools left in its arsenal to prop up growth over the coming years.

“The authorities have clearly engineered this so far…They have many policy buffers to intervene as needed,” Ms. Ohnsorge said.

So far, Chinese authorities have reacted much like they did six months ago, when a bout of unrest triggered a similar stock-market sell-off, a time that Ms. Ohnsorge also pointed to as a sign that the government has a track record in bringing a volatile market situation back under control.

“The biggest problem lies in the fact that the current [Chinese] system is not perfect and can’t deal with all these problems and risks.”

Liu Yuanchin, Economics professor, University of Beijing

Already, the government is preparing a fresh stimulus package to prop up the $6.5-trillion strong stock market, according to financial sources. It may also extend a six-month ban imposed on large institutional investors selling off stocks, or at least require these to report any sell-off plans to authorities.

Not everyone is as sanguine about the situation, however. Some analysts this week have begun warning that the Chinese authorities’ control over their own economy – and the unpredictability of its investors – may not really be that powerful.

“The biggest problem lies in the fact that the current system is not perfect and can’t deal with all these problems and risks,” Liu Yuanchin, an economics professor of the university of Beijing, told Handelsblatt.

Thursday offered one example of that disconnect. While the country’s central bank devalued the yuan currency – a move designed to prop up the country’s economy – investors reacted by selling off Chinese stocks, halting trading in Shanghai for the second day this year.

By contrast, for the first time in a while, the World Bank noted that wealthy economies are primed to prop up the global economy again in 2016, as many industrial nations are emerging from years-long slumps following the 2008 crisis.

That includes the 19-nation euro zone, which, for all its troubles, is actually one of the brighter spots in the world right now, according to the World Bank. Ms. Ohnsorge said the continent has actually pulled up many of its poorer neighbors on its eastern border, boosting their own trading prospects.

“Europe can do a lot for the world if it just grows and keeps its own house in order and manages a robust recovery,” Ms. Ohnsorge said.

The 19-nation euro zone is set to grow by 2.7 percent this year, a slight increase on the 2.5 percent growth seen in 2015. That may not seem like much, but it’s higher than what’s expected for the United States and Japan. As a bloc, advanced economies are expected to grow 2.1 percent in 2016, up from 1.6 percent the previous year.

“What we see from the euro area is if anything a bit of strength,” she said. “We see green shoots, which are beginning to benefit the periphery of the euro area, the eastern rim of Europe.”

 

Christopher Cermak covers finance and economics for Handelsblatt Global Edition in Berlin. He has previously covered the global economy out of Washington D.C. and Frankfurt. Gilbert Kriejger of Handelsblatt Global Edition and Stephan Scheuer of Handelsblatt in Beijing contributed to this story. To contact the author: cermak@handelsblatt.com

 

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