We think China is already growing at 5% in 1H and stabilization looks fragile. We believe actual growth in 1H was much lower than reported, explaining the widespread data disappointments globally, and two drivers of 1H growth (net exports and financial services) do not look too sustainable. We believe stabilization remains tenuous, with risks tilted to the downside on the back of drags from high leverage and excess capacity. We believe achieving 2H stabilization will require more aggressive policy support – monetary, fiscal/quasi-fiscal, etc. (but not via FX).
China’s slowdown is posing a ‘triple shock” to global growth via trade channel. First, spillovers from increased global exposure to China’s final demand – high among commodity exporters (e.g. Australia, New Zealand, Chile, Russia, South Africa, Indonesia), but also non-commodity exporters (e.g. Taiwan, Korea, Thailand). Second, China’s slowdown is impacting commodity prices, which in turn has a knock-on impact on domestic incomes and investment. Third, China’s increasing manufacturing capacity is providing a competitiveness shock from both exports in third markets (especially if China dumps its excess capacity) and export competition/import substitution on higher-value-added goods (could squeeze relatively more upstream producers like KR, TW). OEF macro model suggests that countries more vulnerable to China’s growth are a combination of non-commodity ones with significant trade linkages and commodity-reliant ones (e.g. Chile, Russia).
