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China’s expansion slowdown a boon to global economy
China’s decelerating growth is good news for the global economy, says prominent French economist Eric Chaney. “If China was still growing at 8%-9%, that would probably lead to an enormous build up in terms of debt,” adds the former advisor to the French government
Piotr Zembrowski 31 Oct 2014

China's decelerating growth is good news for the global economy, says prominent French economist Eric Chaney. "If China was still growing at 8%-9%, that would probably lead to an enormous build up in terms of debt," adds the former advisor to the French government and currently head of research and chief economist at AXA.

 

"And we know the story. Each time there was an excessive build-up of debt, it turns into tears, with a large correction and a large fall in income." The slowdown means that China's economy is on a more sustainable path.

 

The deceleration is an effect of structural changes in the Chinese economy, which is moving away from its major focus of exporting manufacturing products and allowing services to account for a larger share. Services are much less efficient than manufacturing in translating scientific and technological innovation into productivity gains, so a slowdown of a maturing economy is unavoidable and reassuring.

 

Even despite the lower speed of annual growth, most recently at 7.3%, China, together with the US, will drive the expansion of the global economy in 2015, Chaney tells a press event in Hong Kong. He estimates the annual global growth next year at 3.25%. The "black spot" in the global economy is continental Europe.

 

"Many economies in Europe have been in recession for years", he says. Three necessary conditions are needed to kick-start this region's economy -- reform of its banking system, a monetary stimulus and a fiscal stimulus. While there have been good news in the ongoing process of banking reform, with recent stress test results "relatively good", there's a dearth of the same in the other two areas.

 

The European Central Bank's recently-announced asset purchase programme is less aggressive than its equivalent in the US, and the results haven't been felt yet. The fiscal stimulus will be most difficult to implement due to political differences between Germany, insisting on austerity, and France and Italy with their resistance to labour reforms. "Recovery in the Euro area is unlikely to happen before the middle of next year, or even before 2016," says Chaney.

 

The emerging market economies may be concerned with the end of quantitative easing in the US and expected rising of interest rates. "The extremely expansionary monetary policy implemented by the Fed since 2009 has been a very positive factor for emerging markets," he says. Its ending will mean reduced capital inflows, and maybe even net outflows.

 

China, with its closed capital account, is relatively insulated from the US monetary policy, and unlikely to be affected by its change. Other important markets (India, Brazil, Turkey) independently proved relatively resilient during the "taper tantrum" of May 2013. India, in particular, will likely be buoyed by its in-depth structural reforms and falling commodity prices.

 

With that in mind, Chaney's outlook on emerging markets is positive. "The correction in equity markets was healthy," he adds. Despite still being "cautious" on equities, he's also positive on US markets, where the PE ratios have been brought down to more realistic values, and that of emerging markets. While cautious on US fixed income, facing a prospect of increasing yields, Chaney's forecastis more positive on European bonds due to the region's economic stagnation.

 

 

 

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