China’s fate tangled with Eurozone
AS CHINA’S economic power grows, its authorities are increasingly willing to punch their weight on the international stage. The decision to direct Chinese airlines to ignore the European Union’s carbon-emissions system is a slap in the face. But can China really afford to be sanguine?
The latest report from the International Monetary Fund (IMF) suggests not. China Economic Outlook concludes that “in the absence of a domestic policy response, China’s growth could decline by as much as four percentage points relative to the baseline projections leading to broad-based consumer and asset price deflation.” As the graph (right) shows, a financial crisis switched the taps off last year – the fallout from the last one saw global growth fall by around 6.5 per cent: “In China, even after a huge credit and fiscal stimulus response, which boosted growth by at least 6 percentage points, growth still fell by 5 percentage points.” It would do so again.
PLAYING CHINA
Brenda Kelly of CMC Markets thinks “the possibility that China can compensate for the global slowdown in their domestic market remains questionable.” She notes that “when it comes to commodities, what every trader needs to know is that China is the biggest buyer – in fact, there is a phrase, buy what China needs to buy, which has served many investors well (as producers of potash, oil, iron ore and copper will attest to in the past decade).” This phrase would be turned on its head if Europe buys less and China builds less. The price of most commodities will only go one way.
Chinese equities would also take a tumble and there are plenty of ways to get on the back of this besides taking positions against individual companies. Angus Campbell of Capital Spreads says clients can trade on the HS Hong Kong index and China Enterprises index. Will Hedden of IG Markets notes many of its clients take contracts for difference on the futures index of China H-shares and the China A50. And David Morrison of GFT says “the most direct way to take a view on China is through trading the iShares FTSE China 25 ETF.”
China isn’t reinventing the wheel; it’s producing things cheaper than almost anywhere else on earth and flogging them to more developed markets. But as with people, the mistakes of a growing nation are more easily forgiven – the report predicts that despite increasing government spending, as a share of GDP it will decline in baseline and contingent debt over the coming years. It is keen to push China to react to a Eurozone crisis with a fiscal stimulus aimed at boosting consumer spending. Yet fiscal stimuli only get a country so far – higher aggregate demand will show up in higher prices and ultimately it only displaces output.
A sharp and deep recession in the Eurozone would hit China hard, offering traders an opportunity to go short. But as Campbell says: “If that were to happen then you could sell just about anything.”