Risk of China hard landing rises to one in three in next three years; ASEAN economies would be hit hard by commodity and investment slump
Tuesday, May 20, 2014 7:01 pm EDT
Public Company Information:
"ASEAN as a region is particularly vulnerable to a China hard landing scenario due to the rapid growth in bilateral trade and investment with China over the last decade"
MANILA, Philippines--(BUSINESS WIRE)--The ASEAN region is more vulnerable to a China hard landing than the US and EU, according to new analysis released at the World Economic Forum in Manila from economists at IHS Inc., (NYSE: IHS), the leading global source of critical information and insight. The risk of a China hard landing will also be discussed at the IHS Forum in Singapore from 10-12 June.
“A hard landing in the Chinese economy is one of the key risks facing the global economy in 2014-15 and our economic model shows that there is a one in three risk of this scenario happening in the next three years,” Rajiv Biswas, Asia Pacific chief economist for IHS, said speaking from Manila.
Using the state of the art IHS “Global Link” model, IHS found that a Chinese hard landing scenario would lower world GDP growth by 0.1 percentage point in 2014 and 0.5 percentage point in both 2015 and 2016.
Japan’s real GDP would be 1.1 percent lower by 2018, while Australia’s real GDP would be down 2.2 percent. By the end of 2016, the level of world GDP is 1.2 percent lower than had China not experienced a hard landing.
ASEAN region particularly vulnerable
“ASEAN as a region is particularly vulnerable to a China hard landing scenario due to the rapid growth in bilateral trade and investment with China over the last decade,” Biswas said.
“ASEAN exports to China have grown at an average pace of 20 per cent per year over the last decade. That has helped cushion ASEAN from weak growth in the key export markets of the US and EU during the global financial crisis, but it has also created greater vulnerability to a China hard landing,” he said.
Significant impact on Malaysia and Indonesia
The impact on the Malaysian economy would be significant, as exports account for a high share of the country’s total GDP, and China is its largest export market. In the China hard landing scenario, Malaysian real GDP is 3.7 per cent lower than the baseline case by 2018.
Indonesia would also suffer some transmission shocks due to the impact of weaker Chinese demand for commodities as well as adverse terms of trade effects due to declines in world commodity prices. Indonesian GDP growth would be down 1.8 per cent by 2018 compared with the baseline case.
Manufacturing supply chain vulnerable to shocks
“ASEAN nations are increasingly integrated into the East Asian manufacturing supply chain, and manufacturing sectors would be hit by shock waves from the impact of a China hard landing on Chinese consumer demand,” Biswas said. “Asian commodity exporters would also suffer from a slump in Chinese demand for commodities, which would also push commodity prices lower.”
Price of coffee, oil and copper among commodities affected
Prices for several commodities would fall in the China hard landing scenario. Comparing the scenario with the IHS baseline forecast, aluminum prices would be 2.1 per cent lower in 2014 and 13.5 per cent lower in 2015; copper prices would be 2.2 per cent lower in 2014, but 16.8 per cent lower in 2015; and iron ore is expected to be 7.4 per cent lower in 2014 and 29.7 per cent lower in 2015. Prices for cotton, coffee, and, to a lesser extent, wheat would also be affected.
A China hard landing would have direct implications on oil prices and oil exports to China, with world oil prices expected to be about $10 per barrel lower on average in 2015 than in the base case.
Emerging market exchange rates affected
Asian emerging market exchange rates would also be affected. Because several emerging markets are highly dependent on China as an export market, and due to risk aversion in global financial markets due to a China hard landing, global financial investors would back away from riskier emerging markets. This puts pressure on some emerging market currencies and causes some countries to raise interest rates to prevent further capital outflows.
The net result of a China hard landing is a weaker growth path worldwide over the next three to four years, with the most severe transmission effects being to other economies in the Asia-Pacific.
China hard landing scenario assumptions and background
The IHS China hard landing scenario assumes a severe tightening of credit conditions, a crash of the housing market and default by major real estate developers, and also assumes a drop in confidence by domestic and international investors.
This is followed by cutbacks in fixed investment and consumption, a slowing of real exports of goods and services, and significant erosion in domestic demand, causing China to experience deflation in 2015. Rather than holding near 7.5 per cent as expected in the IHS central case forecast for the Chinese economy, China’s real GDP growth downshifts to 6.6 per cent this year and 4.8 per cent in 2015 in the hard landing scenario, before gradually reviving.
While the impacts by country and region vary significantly, the scenario developed using a new, state-of-the-art IHS “Global Link” model of the world economy, has a one in three probability of occurring.
The IHS “Global Link” model is the most comprehensive global macroeconomic model commercially available. It covers 68 countries - 95 per cent of global GDP - that are linked with financial flows, trade flows and key commodity prices to give a complete view of the direction of economy. The model incorporates macroeconomic indicators and key sectoral and commodity price data from IHS practices specializing in trade, energy, commodities, consumer markets and risk.
IHS Forum Singapore 10-12 June: Complimentary press passes
The IHS China hard landing scenario will be a topic for discussion at the IHS Forum Singapore on 10-12 June 2014.
Members of the press can now register for a complimentary pass to the IHS Forum in Singapore, held at the Swissôtel The Stamford, 2 Stamford Road, Singapore. To register, please send an email with your name, title and outlet details to firstname.lastname@example.org.
IHS (NYSE: IHS) is the leading source of information, insight and analytics in critical areas that shape today’s business landscape. Businesses and governments in more than 165 countries around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS is committed to sustainable, profitable growth and employs more than 8,000 people in 31 countries around the world.