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How Would World Markets Respond To 4% Chinese GDP Growth? UBS Explains "The Dragon's Tail"
When it comes to explaining why the post-crisis world has been defined by lackluster aggregate demand and a deceleration in global trade, all roads lead to China.
Indeed, the country’s attempt to mark a difficult transition from an investment-led, smokestack economy to a consumption and services-led model has contributed mightily to an epic downturn in commodities which has in turn conspired with an expected Fed tightening cycle and a laundry list of country-specific political risk factors to push EM to the brink of disaster.
All of this is complicated by the fact that no one really knows how China’s economy is actually doing.
Everyone knows the “official” GDP prints are a joke and alternative measures such as the Li Keqiang index and the CBB paint a worrying picture of how the world’s engine of global growth and trade is really performing. “National sales revenue, volumes, output, prices, profits, hiring, borrowing, and capital expenditure were all weaker than the prior three months,” the CBB reported just days ago, commenting on the performance of the Chinese economy in Q4. The profit reading is "particularly disturbing," CBB President Leland Miller said, before noting that the share of firms reporting earnings gains has slipped to the lowest level ever recorded.
As we documented last month, the credit impulse in China rolled over and died in October as banks are reluctant to lend in the face of rising NPLs and corporates are reluctant to borrow in the face of an acute overcapacity problem.
Meanwhile, Beijing’s deficient deflator math - which causes the NBS to habitually overstate GDP in times of rapidly falling commodity prices - only adds to the confusion.
So, how swiftly (or not) is China’s economy actually growing? Well, no one knows, but as we noted last week, you can hardly blame the sellside penguin brigade for sandbagging the numbers.
Effectively, Wall Street is forced to produce forecasts they know are erroneous because trying to estimate actual output in China would mean missing the “official” mark every single time.
Be that as it may, UBS has endeavored to analyze what would happen should real Chinese GDP growth (so netting out deflation) hit 4% (where it almost certainly already stands).
“We try to simultaneously determine the reaction to an extremely unlikely China ‘worst case’ shock on China-hit economies in different regions, and on different asset markets,” UBS says. Again, this caught our eye because not only is this not “extremely unlikely,” it’s actually already the case, so we’re all ears when it comes to assessing the cross-market impact.
“We see the government ramping up monetary and fiscal policy support and accelerating growth supportive reforms, which is why our base case continues to see a grind-down rather than sharp plummet in Chinese GDP growth through 2017,” UBS begins, in an effort to justify their 6.2% 2016 GDP target for 2016 and 5.8% outlook for 2017.
However, they go on to note that Beijing could fail to ease monetary and fiscal policy “sufficiently” leading to “a highly improbable event” that would see China's GDP slowing to 4% “with fixed investment contracting (yes, this can happen in China); real imports collapsing, and import prices declining further.”
“In this worst case scenario,” UBS continues, “falling investment and commodity prices will likely drive both producer prices and the GDP deflator into deeper negative growth territory [while] nominal GDP would likely drop to 1.3%, as the government delivers as many interest rates and RRR cuts as is necessary.”
"The most important channel through which the Dragon's Tail scenario can affect other markets is trade, although financial linkages and market contagion could also have a significant impact on some markets and asset prices," UBS says. Here's the visual:
And here's UBS' take on the impact for DM and EM going forward:
Commodity exporters and regional economies with extensive trade and economic links with China will likely be most affected, while the impact through financial linkages is likely to be concentrated in Hong Kong and Singapore. Of course, as this past summer showed, the impact of contagion is hard to predict and quantify, and could spread to markets and asset classes beyond the usual vulnerable countries with twin deficits and high leverage. Developed economies will most likely feel a chill, but not be critically affected.
In EM, Asia-ex-Japan growth would be hardest hit by a Dragon's Tail scenario, especially Hong Kong, Taiwan, Korea and ASEAN. Latin America would be hard hit not only by trade but also investment flows and a simultaneous knock-on impact on commodity prices, with Argentina most affected. EMEA would be more affected by its indirect trade and commodity price exposures.
In the DM world, Australia's 2016 GDP growth should stay positive but drop sharply to almost zero in a Dragon's Tail scenario, as Japan would return to recession and CPI deflation in contrast to our current positive base case forecasts. Europe's 2016 GDP growth should stay positive in a Dragon's Tail scenario, but slip back to only 1% with Germany, Finland, Austria and France the most exposed.
Of all the economies we track, the US would be the most insulated from a China worst case scenario, in which its 2016 GDP dip would likely dip to a still healthy 2.3% level thanks to its more domestically rooted growth engine. With softer global inflationary pressures, US CPI would likely also soften, potentially slowing the Federal Reserve's pace of tightening to leave the Funds rate at 0.875% by end- 2016 instead of our current baseline forecast of 1.38%. In this scenario, the Euro would also likely end 2016 at 1.10 against the USD instead of the 1.20 we currently expect. The USD would gain strongly against EM and commodity currencies, however.
Right. Got it. So once again, we encourage you to bear in mind that this isn't, as UBS says, a "highly improbable" event.
Rather, this is something that's already happened, so if you put any stock in UBS' forecast for how things will shape up in the event that real GDP touches 4% in China, you should probably go ahead and factor in more pain ahead for Argentina and Brazil, a sextuple recession for Japan, and a decisively less steep "flight path" for the Fed.
In other words: if you're the type that's inclined to predict a resurgence in global economic acitivity, a rebound in commodity prices, and a smooth, successful exit from seven years of "unconventional" Keyneisan insanity, you can just go ahead and give it up.
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"How Would World Markets Respond To 4% Chinese GDP Growth?"
Are you kidding me? They would rejoice considering it's at 0% (possibly negative) right now.
It probably already near 4%
Long USD. The dollar strengthens from these types events.
This is just the beginning, the markets will tank and there will be a breakout of global civil unrest as we embark on a clash of civilizations and a fight for survival in the new year, as it has just been reported that German Chancellor Angela Merkel is allegedly ‘Hitler’s Daughter’ and the Fourth Reich is about to become a reality......
http://beforeitsnews.com/conspiracy-theories/2015/12/the-fix-is-in-franc...
Fuck. Off.
just say it man, FFS. Don't flower it up...
Are those positive or negative numbers?
NRG, to make
Shipping, to send
Follow the metrics
One Ponzi on top of another.
U.S. sold out to China and sold it financial engineering and pollution.
Oh, come on. They didn't pay a plug nickel for the financial engineering and pollution. They straight-up copied that from us free of charge. Those Chinks are good at copying stuff.
Hey NoDebt, how the heck are Ya'?
They didn't "pay" per say, other than millions upon millions enslaved in factories and toxic conditions.
Talk about cultural collapse, on both shores, wow. Now the plebeians in the West and the East wonder - WTF happened?
Sold out.
Hangin' in there, Eb. Hope you're doing the same.
All the sweat shops that used to be in the US back a hundred years ago didn't go away. We just exported them to places we wouldn't have to see them any more. Anything "ugly" can't be done in the US any more because we're so morally superior. We get others to do it now.
Anything "ugly" can't be done in the US any more
Well there's still politics, not to mention Hillary.
China's GDP number is "a joke" due to the fact that their goobermint adds the worth of the economy's goods up, not by final sales, but when they are produced. That's why they built cities that no one lives in, so they could count them as "growth." I repeat, cities no one lives in are "growth."
Because you see, no matter how many FAILs it produces, as every good statist knows -- and that goes double for the Chicoms -- the goobermint knows best.
Still don't get it? "It's a central planning thing homey."
"their goobermint adds the worth of the economy's goods up, not by final sales, but when they are produced."
Um, Stanley, I don't know exactly how to break this to you, brother, but so does the United States. That's why it's called Gross National PRODUCT, not Gross National Sales. The "buffer" between the two is called "inventory".
Yep, thanks for the correction.
Except the rest of the world doesn't build entire cities that are empty in order to boost GDP. For example, the US would start a war and drop expensive bombs all over hospitals and weddings. The BOJ buys stocks. The EU imports millions of third world savages.
"China's GDP number is "a joke""
Thass why the US is exceptional. Every country envies the US becos it is the exceptional country with an experienced Community Organizer for President.
American technology surpasses all others. American exceptionalism would not have been possible without the invention of the TELEPROMPTER !
UBS says 4%.
TRANSLATION: China's new officially-sanctioned growth number is 4% and players operating inside the country are now allowed to use this figure when cranking out their misleading financial articles.
You will soon see it everywhere.
Along with the 1/10th of 1 percent downward deviation permitted by the authorities to avoid giving people the impression that these figures are decreed rather than statistically calculated.
So keep in mind: 4% and 3.9% are the only two numbers you are going to hear until further instructions from Peking are received.
Except of course the idiots who blow off the top. Here, you can stray as far from the official number as you like.
Taking a standard thumb-on-the-scale calculation into consideration, the real number is clearly 1-2% and falling fast.
China is probably at about 1-2% growth, save the propaganda and padding of the numbers and addition of the sales of factories long since closed.Nothing new here. The question is, now that the engine of the growth of the past decade is on the verge of going belly up, AND USA in not much better of a predicament, what is left to keep the world from falling into a depression the likes of which we have never seen?
But yes, China is not doing well. My husbnd goes there from time-to-time. Certain parts are still seeing money flow from Beiing, but when that dries up, it is curtains. No wonder Chinese govement is trying to get Chinese South East Asians to invest there. They are flat-assed broke!
In our wonderful new, supply side, trickle down world we have taken our eye off the global consumer.
How is the global consumer these days?
1) The once wealthy Western consumer has had all their high paying jobs off-shored. As a stop gap solution they were allowed to carry on consuming through debt. They are now maxed out on debt.
2) Japanese consumers have been living in a stagnant economy for decades.
3) Chinese and Eastern consumers were always poorly paid and with nonexistent welfare states are always saving for a rainy day. Western demand slumped in 2008 and the debt fuelled stop gap has now come to an end.
4) The Middle Eastern consumers are now too busy fighting each other to think about consuming anything and are just concerned with saying alive.
5) South American and African consumers are busy struggling with economies that are disintegrating fast.
Oh dear, no wonder there is no demand for Chinese products or any other products for that matter.