The Long Dark Shadow Of A Sharp Slowdown Of Investment In China

The effect of China’s slowdown on the growth of Asian countries that have come to constitute its supply chain is well known. Less attention has been paid to the potential impact on capital exporters such as Germany, South Korea and Japan. The IMF spillover report published last month finds the impact could be significant in cutting growth in all three countries, and notably Germany.

The Fund’s annual spillover reports examine the external effects of domestic policies in the five key economies, China, the Euro Area, Japan, the U.K. and the U.S. While the risks of financial shocks and the global lack of demand are primary focuses, the report also looks at policy risks, which in China’s case are China growth and rebalancing. It notes the progress in adjusting the exchange rate and reducing the current-account surplus. But warms that “the adjustment investment-led in an economy with already high investment rates, an abrupt reversion could yield negative spillovers”.

The charts, taken from the report, assume a sharp reduction in investment, not the gradual one, accompanied by a switch to greater consumption that is a key policy goal for Beijing. The first pair are based on a simple regression analysis, the second pair on more complex factor augmented vector autoregressions, which also include second and third round effects, as highly open economies like Germany’s are hit not only directly but also via the hit to their own trading partners.

Impact of sharp 1% reduction in investment in China, simple regression

Impact of sharp 1% reduction in investment in China, factor adjusted autoregression

Contribution of investment in China to Germany’s exports.

The third chart looks at the contribution of China’s investment to Germany’s exports specifically.

The final pair of charts look at real estate investment, which accounts for a quarter of all investment in China and whose managed slowdown has been a policy priority for Beijing. That a sharp 1% slowdown in investment in Chinese real estate could knock upwards of 0.5% off real GDP growth in Germany, South Korea and Japan and have smaller but not insignificant impacts in Europe and the U.S. makes for sobering reading.

Impact of sharp 1% contraction in real estate investment in China

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2 Comments

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2 responses to “The Long Dark Shadow Of A Sharp Slowdown Of Investment In China

  1. I supposed we could conclude — snowball effects from this ‘merry-go-round’? Meaning — EU slows down affects China, China back to EU …

    About 2 years ago when US financial crisis spreads to Europe and affects euro, the media called China the White-Knight. Actually, I sometime wonder what would be the effect on the world economy now (and future), IF China actually gallops into EU and rescued the euro there and then, without strings of course but out of sheer comradeship as one of the power of G20?? Could they have save themself some of the hardship now? Or not?

    • China Bystander

      I am not sure what rescuing the euro means. If it involves providing cash for bailout packages, that won’t do much good without structural reform within the eurozone. That doesn’t come without conditionality, whether it is Berlin or Beijing that is providing the money. The most help China could give Europe now would be to open its markets further to European exports. That in turn requires more reform in China to rebalance the economy towards domestic consumption and to unleash the latent buying power of the Chinese consumer. –CB.

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