Forget about all the shoes, toys and other exports. China might soon have another thing to offer the world — a recession.
That is the prediction from Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, who said a continuation of China’s slowdown in the next years might drag global economic growth below 2 percent, a threshold he views as equivalent to a world recession. It would be the first global slump in the past 50 years without the US contracting.
“The next global recession will be made by China,” Sharma, who manages more than US$25 billion, said in an interview at Bloomberg’s headquarters in New York. “Over the next couple of years, China is likely to be the biggest source of vulnerability for the global economy.”
While China’s growth is slowing, the nation’s influence has increased after it became the world’s second-largest economy. China accounted for 38 percent of the global growth last year, up from 23 percent in 2010, according to Morgan Stanley. It is the world’s largest importer of copper, aluminum and cotton, and the biggest trading partner for nations from Brazil to South Africa.
The IMF last week cut its forecast for global growth this year to 3.3 percent, down from an estimate of 3.5 percent in April, citing weakness in the US. While the Washington-based lender left its projection on China unchanged at 6.8 percent, the slowest since 1990, it said “greater difficulties” in the nation’s transition to a new growth model poses a risk to the global recovery.
China’s economy would continue slowing as the nation struggles to reduce its debt, Sharma said.
An additional 2 percentage-point slowdown would be enough to tip the world into a recession, he said.
The global expansion, measured by market exchange rates, has slipped below 2 percent during five different periods over the past 50 years, most recently in 2008 and 2009. All the previous world recessions have coincided with contractions in the US economy.
China’s US$6.8 trillion equity market roiled global investors over the past few weeks after a year-long rally accompanied by record borrowing and surging valuations ended in a bear market.
The Shanghai Composite Index slumped more than 30 percent in four weeks through Wednesday last week, wiping almost US$4 trillion in market value. The unprecedented government intervention used to bolster the market failed to inspire confidence until last week, when regulators banned major shareholders from selling shares for six months and allowed more than half of listed firms to suspend trading.
The market collapse has challenged some investors’ long-held conviction that the Chinese authorities have an adequate grip on the economy and markets, and that the government is always able to achieve its goals, Sharma said.
“What happened in China last week was so significant in that for the first time you’ve got this sign that something is out of control,” Sharma said. “Confidence damage is going to last for a while.”
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