A few months ago, we already alerted you in a previous column [11] about some interesting remarks, made by Christine Lagarde, the head of the International Monetary Fund. Lagarde said that ‘if there’s any growth amongst the emerging countries/economies, it will come from India [12]’. Since this statement, the Central bank of China has cut the interest rates even further.
[13]
Source: tradingeconomics.com
That was a remarkable statement and initially we thought this was just a strategy to draw the attention away from the Chinese stock market which was extremely volatile during the summer months, but now the Chinese President, Xi Jinping, told the attendees of the G20 meeting in Turkey that ‘the world needs to find new sources of economic growth’ [14], and that’s a very remarkable statement from a government leader that has continuously said there’s no problem at all in China nor with the Chinese economy.
[13]
Source: Huffingtonpost.com
The statement isn’t a real surprise as the Chinese economy grew by just 6.9% YoY, which seems to be the lowest growth rate in a few decades. And that could be worrisome. Of course, at a pace of 6.9 (or 7)% per year, the Chinese economy is still fairly robust and it will continue to grow. However, Jinping’s recent statement might indicate China is unsure whether or not it will effectively achieve the 7% growth rate in the current financial year and the country might already be preparing the world for a sub-7% economic growth from next year on.
[13]
Source: stockcharts.com
The financial markets in China didn’t seem to care too much about the statement, but we’re afraid the 200 day moving average (the red line on the chart) might be a very difficult hurdle to take in the coming weeks.
[13]
Source: tradingeconomics.com
Every modern first world country would be ecstatic with even just half of that growth rate, but a slowing Chinese economy would send shivers down a lot of spines. Why? Because there is no alternative, and the entire world seemed to have been relying on the double-digit growth numbers.
Truth be told, the entire world was looking at China to ensure continuous economic growth. Keep in mind it was the Chinese economy that pulled the world out of the global financial crisis in 2008. It was the Chinese economy which boosted the early stage economic recovery of the first world countries. And now, seven years after the GFC, China’s slowdown might have larger repercussions than originally anticipated as there simply is no plan B.
Where will the world’s economic growth come from? Europe? Give us a break. Canada or Russia? Not with the current oil and gas prices. The USA? Not if Yellen increases the interest rates in December. And yes, the general consensus seems to have evolved towards a rate hike in December, but we remain convinced the American economy remains too weak to fully digest it. Keep in mind ECB president Mario Draghi has announced he is prepared to do whatever is necessary to increase the inflation rate and has hinted at further interest rate cuts (even though the deposit rate is already negative) and purchasing more bonds to increase the liquidity in the system.
A slowing Chinese economy and a looming rate hike in the USA whilst the European counterparty will be cutting the benchmark interest rate does not make sense at all right now as the only thing the Federal Reserve will accomplish, is to hit its own economy due to the lower demand for American products due to a deteriorating economic situation and an expensive dollar.
China’s statement that ‘growth will have to be found elsewhere’ indicates a rate hike by the Federal Reserve could be a really, really bad idea.
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