A Hard Landing In China Part 2 - Rest Of The World Impact

Tyler Durden's picture

Via Wei Yao of Societe Generale, ...and what it means for the rest of the world

Following on from our earlier discussion of how a Chinese hard landing would evolve, SocGen now examines how a Chinese hard landing would impact the global economy. They see the contagion in several ways: mechanically (since China is part of the global economy) and through trade, financial and market channels. Mechanically, a slump in Chinese GDP growth to just 3% would cut our global GDP growth forecast by 0.6pp. Add to that the channels of transmission to the global economy, and our expectation is that a Chinese hard landing would result in 1.5pp being slashed from global GDP growth in the first year.

How important is China as a source of global demand?

With imports equivalent to 30% of its GDP, China is a major source of global demand. Exports to China as a percentage of GDP are largest in Asia and amongst the commodity exporters, so these countries would be hardest hit. Drawing on different studies, mainly from the IMF and the OECD, we estimate that the impact of the trade channel from the type of hard landing in China described in the previous section would cut 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. For the global economy ex-China, the trade channel effects would bring about a reduction of around 0.7pp to GDP growth.


The impact of a Chinese hard landing on the rest of the world could be aggravated by the fact that investment would be particularly hard hit. As noted in the previous section, we expect investment – which now makes up half of Chinese GDP – to fall more than consumption if China does suffer a hard landing. And investment has significantly higher import content than consumption, most notably through commodities and machine tools. This could have a particularly sharp impact on some smaller commodity producers. For example, exports of energy and metals to China make up over 40% of Mongolia’s GDP. In terms of capital good exports to China, Taiwan has the closest ties, depending for just under 15% of its GDP thereon; but this is already a much lower number than that of Mongolia and many of the other commodity exporters. Exporters of consumer goods are less exposed, as seen in the chart overleaf.

For all the talk of the importance of China to exporters such as Germany, the absolute numbers remain modest despite strong growth in recent years.


Would currency and trade wars result?

The decline in global trade that would come with a China hard landing naturally leads to the question of whether currency and trade wars would result. As outlined by Wei Yao in the previous section, our scenario assumes Chinese policymakers would tread very carefully, being only too well aware of the dangers. In Washington, the appreciation of the dollar that would follow as investors (both new foreign investment and US repatriation from abroad) seek the safety of US shores would not be welcome. Moreover, the Chinese yuan would be far from the only currency depreciating against the US dollar; trade weighted, our China hard landing scenario assumes a 10% dollar appreciation in the first year and this despite additional QE from the Fed. It does not take any great stretch of the imagination to paint an even bleaker scenario in which a China hard landing triggers outright currency wars and protectionist measures on trade flows. This would further aggravate the negative impact of a China hard landing and extend the duration of the shock.

How important are financial links to China?

Of the total foreign claims of BIS-reporting banks as of June 2012, only $731bn – or just 2.4% of the total – are on China. The risk of China transmitting a hard landing to the rest of the world through the banking channel thus appears modest. Foreign corporations present in China would see the value of their investments decline, but more importantly, profits generated in China would slump, hitting several major multinational companies. The response would be cost cutting, and not just in China.

Does the starting point for the global economy matter?

Our what-if analysis of a China hard landing draws on a wide body of academic research that analyses various shocks and how these disseminate to the global economy. These analyses often implicitly assume the starting point of an economy in equilibrium and with a well stocked arsenal of policy ammunition. The current situation is very different, however, with large output gaps in many of the world’s major economies, ongoing headwinds from deleveraging and policy arsenals already depleted. Add a China hard landing to the mix, and we expect the result would be a far greater uncertainty shock than had the starting point been a world in overall good health. Uncertainty would cause corporations globally to hold back further on investment and hiring decisions (even those not directly exposed to China). And, feedback loops from financial channels would further amplify the uncertainty shock as risky asset prices collapse. At the global level, we estimate that the combined uncertainty shock in our China hard landing scenario could exceed 1% of global GDP.


Where could offsets come from?

The effects of a Chinese hard landing on growth could, however, be offset by some secondary effects. Lower commodity prices are perhaps the most important. As a rule of thumb, we assume that, all else being equal, a $10/b permanent drop in the oil price would boost global GDP by around 0.3pp. Our commodity strategists’ assumption that a Chinese hard landing would initially cut oil prices by 30% implying a first offset.

The greater hope for offset is policy. Central bankers are usually the first at the scene of any shock and a first response would likely be more QE from the Federal Reserve, Bank of Japan and Bank of England. However, several prominent central bankers have already noted that there is a limit to QE and that it comes with diminishing returns. The ECB would keep the promise of OMT (Outright Monetary Transactions under the conditionality of a European Stability Mechanism programme) on the table and continue to supply amply liquidity. Central bankers could also explore other possibilities. The BoE already has a funding for lending scheme, the BoJ buys ETFs and REITs, Danmarks Nationalbank has a negative deposit rate … none of these measures have to date proven a panacea, however. This would not prevent central banks from trying, but we remain doubtful it would work and also note that some measures would require changes to legislation (such as the Fed buying equities) and would thus not be a day one response option. Turning to fiscal policy, we believe most advanced economies have little room for manoeuvre, though the US and Germany are potential exceptions; but even here we would not look for aggressive steps measures.

By contrast, emerging economies have greater room for both fiscal and monetary policy stimulus. If China does experience a hard landing however, some of the foreign inflows attracted by the higher returns in these markets could reverse, adding to pressure on these economies (albeit with the silver lining of currency depreciation).

Overall, we see little scope for economic policy to significantly offset the negative effect of a Chinese hard landing on the global economy. Additional policy stimulus would mainly serve to limit negative tail risks.

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bobert's picture

Remove the debt ceiling obstacle and our president will spend us and the Chinese into Nirvana.

ball-and-chain's picture

The fact that the globe needs China is really sad.

We need a fascist government like a hole in the head.

Forced abortions.  Poison dog food.  Contaminated milk.  Command and control.

No thank you.

Check please.


reader2010's picture

but in the final analysis what really matters to the elites is profits tho.

Freddie's picture

We need a fascist government like a hole in the head. Forced abortions. Poison dog food. Contaminated milk. Command and control.

How dare you speak ill of our dear Mullah O and Joe Biden the biker chick groper in this manner!  Obama did give us the $1 trillion Platinum coin. 

mvsjcl's picture

I find the poison dog food particularly alarming. They may be targeting our vulnerable senoir citizens, who are increasingly and rapidly seeing their life's savings stolen from them via criminal Fed policies, and are thus resorting to more desperate nutritional alternatives.

Seer's picture

Fucking A!

When they get that 3-D printing thingy all worked out we're going to be spitting out platinum coins- SAVED!

Sudden Debt's picture



.                                                                                   Bernanke's Son

lordbyroniv's picture

China has been growing for 15 years without any real recession/depression.  All the malinvested fiat they have built into their economy according to Austrian economics HAS TO be unwound at some point.  I find it hard to believe 9% - 15% GDP for the last 15 years is going to be allowed in perpetuity without the free market intervning.

disabledvet's picture

I was under the impression that Chinese economic activity was in fact picking up. Certain the Shanghai Composite has been a real "barn burner" for the past few months: http://seekingalpha.com/symbol/fxi has sold off with the US Market this week i might add. I'm obviously no insider...don't know anything that isn't in the papers...or worse. Nor am I economist...nor have i yet to be asked to play on economist on TV...but would like to if asked. anywho Chimerica is the real deal...I believe they're big investors in Oaktree and Howard Marks actually.

Seer's picture

Not sure how you're looking to be impressed, but one need only step back from all this micro stuff and look at the macro to see that it's all heading over the cliff.

Who is going to buy from China when everyone's broke?

While China can crank up internal consumption there's still the issue of it being able to generate revenue to pay for imports such as oil/coal.

At a measly 3% growth that still translates in to a doubling in about 23 years.  Will the globe have enough resources 23 years from now to support China consuming double what it is now?

AFRICOM - China has become highly dependent upon materials from Africa.  The US has recently established a military command structure covering Afrcia.  Expect "unrest" in Africa: more "al Qaeda," or whatever (perhaps even direct finger-pointing at the Chinese).  Expect supply lines to China to be a bit more fragile.

MaxThrust's picture

Please can we have the hard landing now so we can initiate the global banking meltdown.

The banking Cartel has had it too good for too long, time for a reset.



Poor Grogman's picture

Australian housing market will be right as rain.


Seer's picture

I can't believe how long they've been able to keep that fucker up.  Kind of like the Canadians...  My guess is a lot of foreign buyers.  But, given the subject of this article, I'm thinking that this party has pretty much run its course as China starts to compress.

tabasco71's picture

On a call yesterday and the topic of hard landing in China came up. One of HSBC's senior economists response was along the lines of "the industry of doomsayers commentating China continue to be confounded" and something else suggesting that "just when you think its all over, it picks up and keeps going from where it left off".

I had a flashback in that second that exactly these type of comments were being made about property back in 05-07...

lewy14's picture

Hard landing proximate cause sighted?

Chinese shadow bank credit growth going negative... 

What the Politburo giveth, the Politburo taketh away...

walküre's picture

Mercedes is confident that growing demand for their cars in the US will offset decreasing sales in China.

Say what?

Seer's picture

I think that the proper translation is: Free drugs!

If Japan is going to bail out Europe (ha ha; in order to stabilize itself - ha ha!), then I suppose the US could help bail out Mercedes.  US wouldn't want to look like it was slacking...

Mark my words, the word of the year is going to be: Clusterfuck

lmile61's picture

TaKing a time to write such kinds of post is really great i just love to get the information form this website.. magento development

BlackVoid's picture

Hard landing in China: not gonna happen. At least, it is not China that will have the first hard landing. 

I know some people who have been predicting this for years, with zero success.

Seer's picture

How about not leaving us with the cliffhanger- who is going to crash first? (keep in mind that the US has a printing press; it also has the greatest military force; this is enough to stay in the game for longer than most)

"I know some people who have been predicting this for years, with zero success."

Your prediction of -"not going to happen"- has a far greater probability of generating a "zero success" than the prediction from those "some people."

I know a guy who knows a guy who knows a guy who knows... so there!

BlackVoid's picture

I wish I new who is going to be first, I only know the contestants: 




I have absolutely no idea who will crash first, but one of these will. And then it will drag everybody down, including China.

Sudden Debt's picture

so... iPhone will get even cheaper?!



meatbag's picture

Ok, both these articles are puff, fluff nonsense.  I would like to see a China correction as much as anyone.  As anyone who has traveled to China often over the last 10 years I am sure that you too remember the good old days.   Days when as a western businessman you felt wealthy traveling to China.  Now, we are by all accounts second class citizens as it seems that every other car is a German luxury model, factories routinely turn away orders they think are too "troublesome", etc.

Neither of these articles and none of the comments provide even a reasonable explanation on what might trigger a significant correction in China.   To me, it just does not feel right in China.  What I mean is that I just don't see where all the personal wealth is coming from.  There is still a huge population of "worker class" that scrapes by on a meager income.  But there is an equally huge population of people with what I observe as modest value add, who seem to have hit it big.

However, even though it does not "feel right", and has not felt right for years, the correction is nowhere in sight and I have never seen anyone give a good explanation of how it might appear.

Here is my analysis.  The property market is a huge source of growth & confidence in China.   Not only does it provide real income for investors, but more important it provides a sense of confidence for the entire population.   What you need to understand about the property market in China is that prices now have nothing to do with real demand for living space.  It is purely a speculative tool.  Much like Apple trades at many times earnings, property in China acts exactly like stocks. 

The fact that the apartments are empty concrete shells is actually a huge positive and not a negative.  Unlike a house in a western neighborhood that must have the lawn cut and the driveway plowed, a empty apartment shell in China can sit vacant for 50 years and it will lose no value from lack of maintenance.  It is just a concrete shell and can be built out at any time.  So people buy and sell apartments in China, much as we would buy and sell stocks.   We don't need to see the paper stock, or keep the paper stock in safe keeping any longer, well the Chinese don't worry about their concrete shell apartments either.  

As has been said, China's laws prevent apartments from being bought with excessive loans, so most of the speculation has been done with cold hard cash.  It is just that all that cash that has been kept under the mattress has now come out and is now sitting in concrete shells.   If the property market falls dramatically, the shell is more useful then the paper was, at least your grandchild or cousin can live in the concrete shell. 

The Chinese are not investing in the local stock market because the Chinese know that the Chinese are cheats.  So they leave it to the foreigners to buy Chinese Stocks (suckers). 

All this nonsense talk in the the comments section about the Chinese government's numbers not to be trusted, etc. is all rubbish.  The Chinese don't waste their time worrying about statistics.   The Chinese are as hard a working culture as any I have ever seen, they are extremely xenophobic, and they will never leave a penny on the table.  They accumulate their vast wealth one yuan at a time, never leaving a single dollar to exit China.   They will suck and suck until they have sucked up every penny that is not nailed down. 

But, economies are not controlled by governments, not by economic laws, not even by armies.  Economies are controlled by the human mind.  As long as the Chinese are confident, their monopoly money (which right now is in the form of concrete shells), will be worth more and more to the next Chinese who decides to bring out the old Yuan from under the mattress.   However, the whole house of cards will come crumbling down if and only if the Chinese themselves lose confidence.   

The confidence in China today is palpable, in fact it is so thick you can cut it with a knife!   So, my question to all the ZH's is what will break this confidence?   I think that although the confidence, a dare say arrogance, is very real, I also think that it is very fragile.   I believe that in their hearts, the Chinese are not a confident people, in fact they are not happy with themselves because of the greed, shallowness, lack of regard for others, etc. that seems to be manifesting itself so often now as the stories we hear of the car running over the 2 year old only to back up to make sure it is dead and then speed off to avoid having to pay a fine.  Therefore, when something manages to pop this current skin of confidence, the soft insides will comes running out quickly and that I think will be the correction that all of feel has been so long over due.   What might be the trigger?    Not people protesting high home prices, no one lives in those concrete shells, there is plenty of cheap housing to live in.  Also, the Chinese respect wealth and power, they don't envy it and cry about it like in the west, they work hard (and cheat) to attain it.    It will not be the government that causes the property market to pop.  The west would need to grind to a complete stop in order for lack of exports to have a big enough influence, so if this happens in the west, it will hardly be reason to celebrate the correction in China.  Lack of foreign direct investment?  Maybe, but with the rest of the world in recession, where else will the world put its money?   So I doubt that foreign investment will dry up anytime soon.   World War?  Maybe, but again, who cares about China at that point.   Japan attacking China?  I think that would be a huge positive for China's economy.    Help!  I am trying so hard, but I can't see what will be a big enough pin to break through this incredibly thick skin that has grown around the China "confidence" engine.    


HOBO POTHEAD's picture

Dear Mr. Meatbag, a couple of questions:

Do you think the Chinese PTB will somehow FORCE the Chinese to invest in the stock market to provide Chinese corporations with capital for expansion?

Do you think the Chinese people/banks will in due course be big buyers of gold and/or silver because they don't trust paper of any sort?



meatbag's picture

The Chinese PTB can't really force anyone to do anything in China.  Unless that is they put a gun to your head and they can't do that with 1.2 Billion people.  Therefore, they work through influence much like any other government.  So far, they have not made much effort to promote the stock market, however they have made an effort to urge Chinese to invest in gold and it is working.

Chinese are momentum investors from what I have observed, so if their neighbor is making money, their first thought is that they need to do exactly what he is doing else they will be left behind.

Gold is already the #2 destination behind real estate for Chinese investment.

What I could see happening is that the PTB could artificially inflate the stock market, thus making it appear that stocks are the next big thing and momentum will carry money from real estate to the stock market.   However, again, the culture of Chinese is to actually own something physical is always better than owning a "certificate", thus the stock market has limited appeal.

HOBO POTHEAD's picture

Thanks, Meatbag.

Why did the Chinese PTB encourage the Chinese to buy gold? I'm puzzled because I see the Chinese PTB forcing productive capital investment of every sort - dams, nuke reactors, electronics, aircraft etc etc etc.. However, gold is not a capital good, and in any case how does it benefit the Chinese PTB or national development if ordinary Chinese have gold in a can hidden under their bed? I can see how ownership of gold would benefit national interest if if the Chinese Central Bank owned it but I can't understand how gold is doing any good (from the perspective of the PTB) if ordinary people are just hoarding it in 500,000,000 seperate cans under 500,000,000 seperate beds. The only possible benefit I can see is that such an inflow of gold would mean that the Western nations would have less gold and then possibly less clout in international matters.

Thanks again