G20 tries to dispel China fears with sunny economic outlook
Finance ministers from the G20 nations have insisted the global economy has nothing to fear from a China slowdown as they tried to dispel the pall of gloom that has been cast by sagging growth and market turmoil.
At the end of a two-day meeting in Turkey the representatives, accounting for 85 per cent of the world’s output, expressed confidence in the economic forecast in spite of mounting evidence that global growth is falling short of expectations.
European ministers showed firm support for Beijing, which convinced many G20 officials that its devaluation and new currency management arrangements constituted a step towards a more market-determined exchange rate rather than a ploy to boost exports.
Wolfgang Schäuble, German finance minister, said the G20 agreed there was no reason to fret over slower Chinese growth, while Pierre Moscovici, the EU Commissioner for economic affairs, praised “the absolute determination of the [Chinese] authorities to sustain growth”.
US support was more tempered. Jack Lew, US Treasury secretary, pressed Lou Jiwei, his Chinese counterpart, for a signal that China would allow market pressures to drive the renminbi up as well as down.
So far, economists have struck a sanguine tone about the impact of China’s malaise on American growth — one of the global economy’s few bright spots — ahead of a US Federal Reserve meeting on whether to raise record low interest rates for the first time in nearly a decade.
Global growth forecasts have been coming down, with the International Monetary Fund expected to cut its outlook in its Autumn update, but direct linkages between China and the US — the world’s two biggest economies — are narrow.
This suggests that a sharp Chinese downturn could leave the US economy less waterlogged than many of its partners.
New forecasts from Goldman Sachs on Friday suggested that the China-induced turmoil so far — including the recent financial volatility — might reduce US growth by around 0.2 of a percentage point over the next year, a fairly modest effect.
Adam Posen, the president of the Peterson Institute of International Economics, argues the market ruckus has been overblown. While China’s government has mismanaged the situation, only a modest portion of the population is exposed to the stock market falls and there is evidence that consumption has held up, he said.
“People are making too much of the China slowdown. Financial and trade links directly from China to the US are quite limited,” Mr Posen added.
The US has a relatively closed economy with exports clocking in at just 13 per cent of GDP, compared with a 70 per cent contribution from consumer spending, making it in theory one of the least vulnerable big economies to a Chinese breakdown.
Just 7 per cent of US exports go to the People’s Republic. Deutsche Bank research last week suggested a 1 per cent decline in Chinese growth would cut US growth by just 0.1 of a percentage point.
While China has been a growth market for multinationals such as Apple, members of the S&P 500 overall derive only 2 per cent of their revenue directly from China, according to Goldman. Big US banks’ direct exposure to China’s closed financial system is also very modest, at around 3 per cent of assets.
Set against this, however, are the broader ripple effects from China’s woes. Research to be published by Oxford Economics this week will argue that the key risk to the US from a big Chinese downturn is via its indirect impact on other emerging markets, which could trigger financial stress and a more generalised trade slowdown. While US exports directly to China may be modest, emerging markets account for closer to half of US merchandise exports, it points out.
The Chinese authorities’ interventions in troubled financial markets have also raised questions about just how skilled its economic policy makers are and whether the ruling Communist party government is able to manage so complex a continental-scale economy through a formidable period of transition.
Some officials argue against drawing rosy conclusions. Mario Draghi, European Central Bank president, last week suggested negative effects from the China volatility could be felt in Europe via the trade channel and damage to confidence, as he left the door open to a further blast of monetary stimulus.
Eric Rosengren, the president of the Boston Fed, also struck a cautious note, saying the slowing of foreign economies, coupled with volatile stock prices and falling commodity prices, could point to a significant “downward revision” in the US growth forecast.
At the Fed, officials are tracing the possible China-linked risks ahead of its meeting on September 16-17. The central bank would not want to lift rates at a time of severe market volatility, but if markets calm down by September 16 other factors will come into play.
Jon Faust, a professor at Johns Hopkins University who used to be a Fed adviser, said at a panel at the Brookings Institution last week that US policymakers needed to try to look through the China-inspired market gyrations to form judgments on the real US economy.
He added: “Does the volatility signal something about the underlying economy, or is it like a lot of volatility in financial markets — the kind that will ultimately leave no trace in the data?”