China – down but not out

In last week’s blog I mentioned the over-valued credit markets in China as a key risk to financial market stability. This week saw Moody’s downgrading of China’s credit rating and its outlook for China changed from stable to negative.

The slowing of growth

Despite economic stimulus, GDP growth has fallen pretty steadily since 2010 and both consumer spending and household and business confidence are declining. The risk of fast credit growth turning into weak growth as a result of the bubble bursting places enormous strain on the Chinese economy.

But there is also a huge risk to the world economy. China’s nominal GDP stands at $12tn, second only to the US, and in growth terms, the country is unsurpassed. Flows into and out of China are crucial to maintain global economic stability, but also financial market stability.

What we need to remember is that China’s growth still stood at a respectable 6.7% in 2016 and we’re hearing a lot of talk about reform as the Chinese government aims for greater stability. All the same, this latest move could signal increasing fragility.

New trade and investment opportunities

However, Moody’s pronouncement comes only a little over a week after Beijing hosted a gathering of 30 heads of state to kick-off its major infrastructure project aimed at linking China with the rest of the world. If this attempt to revive the ancient ‘Silk Road’, (the Belt and Road initiative) works, it will see China forging new links to the world, outside of those dominated for centuries by Europe and the US. This is far too meaningful an event to be ignored or overshadowed by Moody’s downgrade and holds huge importance for global trade in the longer-term.

What it clearly shows is that headlines dominated by the downgrade and its portents of doom for China’s future are far from the truth. Whilst it reinforces the need to question how strong global financial markets actually are in the face of the type of risks I outlined last week, this is certainly not the end of China’s position as a global economic force, but merely a pause in its upward march.