Banking crisis and slowdown imminent in China, but regional impact will be limited: Bank of Singapore

SINGAPORE — While China’s economy will grow much less in the aftermath of an imminent banking crisis, the slowdown is not likely to have a substantial impact on neighboring countries. This is according to Mr Richard Jerram, the chief economist at the Bank of Singapore, who shared his views on economic outlook today (July 3).

“It appears that a lot of Asian economies export a lot to China. But if you strip out what is then re-exported to other places, you’ll find the sensitivity to domestic demand in China is not that high for most Asian economies,” Mr Jerram told reporters at the media briefing. “Typically just 4-6 per cent of their GDP is tied to domestic demand in China; they are actually much more sensitive to growth in Europe and the US.”

But a slowdown in China is certainly in the making as the world’s second largest economy looks to navigate a brewing banking crisis, Mr Jerram noted.

“Credit extension in China has been reaching 70 per cent of GDP in the space of 5 years. The IMF benchmark is that if you’re credit over GDP ratio gives up by 13 per cent annually for 3 years, you typically have a banking crisis. China has more than that, and has been so for 5 years. There should be a better than even probability for China to have a banking crisis,” he said.

“The government finance is reasonably healthy and can buy the loans from the banks and protect the system. But when they do this, economic growth is going to slow down a lot,” he added. “Typically in such transition, a developing economy will suffer a 5 per cent drop in growth rate, so for China’s growth to slow from the 10 per cent levels to around 5 per cent will be a perfectly normal transition.”

China’s GDP expanded by 7.4 per cent in the first quarter of this year, marking the slowest growth pace in six quarters. A lower growth target of around 7 per cent should be expected for China, the IMF deputy director David Lipton said last month during his visit to Beijing.

“For now they’ve managed to support growth and steer away from hard landing, but how well China can manage this transition is going to be the risk to watch for next year,” Mr Jerram said.

Meanwhile, the likelihood of the US Federal Reserve raising interest rates earlier than expected may create further uncertainties, as US headline unemployment rate fell to 6.3 per cent — the lowest since September 2008 – according to the latest June data.

“The improving economy is dragging down the unemployment rate, and the Fed is looking at the numbers and struggling to judge how much slack there remains for the economy, which is crucial to decide when to raise rates,” Mr Jerram said.

“It looks like they’ll wait for about another a year, and we believe the Fed will raise rates in the second quarter next year,” ahead of the general consensus of 2015’s second half, he added.