China’s balancing act is the biggest risk to the world economy as inflation data shows prices still off target
China’s economic rebalancing is the biggest threat to the global economy, the ratings agency Fitch has said, warning that a “hard landing” would trigger ripple effects around the world.
The difficulties associated with shifting the world’s second largest economy from a reliance on investment towards consumption are “sharpening” according to Fitch, as authorities face the problem of balancing the speed of that shift with the impact it would have on short-term growth prospects.
Inflation data released this morning also presented a mixed picture on the health of the Chinese economy. The consumer price index (CPI) rose by 2.3 per cent year-on-year in April – coming in slightly below analysts’ expectations and marking a third consecutive month of flatlining.
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A measure of inflation for manufacturers – factory gate or the producer price index (PPI) – showed prices dropped by 3.4 per cent in the year to April – amounting to more than four years of falling prices.
The Chinese central bank – the People’s Bank of China (PBOC) – targets CPI inflation of three per cent a year, so today’s figures should allow it to continue, or extend, its stimulus programme.
However, this could cause problems for the wider region, as Fitch said that devaluation of the yuan would lead to downgrades of sovereign and corporate credit ratings in countries closely connected to China.
“Significant risks associated with China’s macroeconomic rebalancing remain a dominant source of uncertainty for sovereign, corporate and bank credit within the country and in many parts of the wider Asia and Pacific region,” Fitch said.
The Asia Pacific risk radar
Fitch’s risk radar projects risks onto a matrix which combines how favourable or unfavourable a development would be with how immediate a risk it is.
Unfavourable means credit ratings are likely to be cut, while favourable means they could be upgraded, and factors deemed more urgent than others are those most likely to materialise within the next two years. The size of the bubble indicates the potential impact such an event would have – the larger the bubble the bigger the shock.
“Imbalances in the economy, ranging from significant oversupply in certain corporate sectors, the potential of a large build-up in bad loans in the banking sector and the outsized role of capital investments in the economy [have] the potential to trigger a sharp deterioration in macroeconomic and financial conditions in China and elsewhere,” researchers added.
China’s economy officially grew by 6.9 per cent in 2015 – its slowest rate of expansion for a quarter of a century. This year, the government is targeting growth of between 6.5 and seven per cent.