UBS: Chinese Whispers

As anyone who has looked at asset prices quickly realises, markets have been feeling worried. They have been worrying about global growth, and in particular about growth in China. The Federal Reserve recently joined in with these concerns, wondering how any global or Chinese slowdown might affect the domestic US economy.

The challenge is that nobody really knows what impact a Chinese slowdown might have on other countries. China was nowhere near as important the last time it went through a separate slowdown. The ongoing deceleration in China puts the Chinese authorities in a difficult position: they must strike a balance between managing down the vulnerabilities in the economy (such as high leverage) and avoiding a disruptive adjustment. If they get the balance wrong there could be a significant shock to the global economy.

The impact of the hard landing on individual countries or regions is likely to be very different. Figuring it all out is a challenging task for economists, so it is no wonder that the Fed has turned more cautious. There are also numerous channels through which the impacts of a Chinese hard landing can be transmitted. The most obvious channel is trade. China tends to export more to developed markets than it imports, but it does still import and if China slows down these imports would likely decline. While Chinese imports from developed markets like the US, Germany and Japan may be significant for China, they are less important for those countries.

For instance, imports from the US to China amount to 8% of Chinese imports, but this equates to less than 1% of US GDP (chart 1). So even if there is a significant impact on imports from China slowing down, it is unlikely to have a large direct effect on the US economy. On this basis, even Japan is not that heavily exposed to the direct Chinese trade shock. Many emerging markets, especially in Asia, have a much stronger dependency on China.

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