IMF Cuts Global Growth Forecast As China Growth Slows

IMF Cuts Forecast of Global Growth

Recently the International Monetary Fund – IMF had cut its forecasts of global growth for the third time in less than a year, as the new figures from Beijing indicated that the Chinese economy in 2015, had been at its slowest rate in a quarter of a century. The IMF, to support its forecasts had cited a sharp slowdown in China trade and weak product prices which were hammering Brazil together with the other emerging markets.

 The Fund had forecast that the world economy would tend to grow at 3.4% towards 2016and 3.6% in 2017; both the years would be down by 0.2% point from the earlier estimates made last October. It has stated that policymakers need to consider means of bolstering short-term demand.

The updated forecast of the World Economic Outlook came as global financial markets were shaken by worries over the slowdown of China as confirmed by official Chinese data on Tuesday together with the plunging oil prices. IMF had maintained its earlier China growth forecasts of 6.3% in 2016 and 6.0% in 2017 representing sharp slowdowns from 2015.

Concern over Beijing’s Hold on Economic Policy

According to China’s report, growth for 2015 had hit 6.9% after a year wherein the world’s second biggest economy had suffered huge capital outflows, a slip in the currency as well as summer stock market crash. There was a rise in shares in Europeand Asia and the dollar gained after the China data had been released, while investors expected greater effort by Beijing to spur growth.

 There was concern over Beijing’s hold on economic policy which had shot to the top of global investors’ risk list for the year 2016 after drop in its stock markets as well as the Yuan fuelled worries that the economy would be quickly weakening.

The Fund also mentioned that a steeper slowing of demand in China seemed to be a risk to the global growth. The weaker than expected Chines imports as well as exports had been weighing heavily on the other emerging markets as well as commodity exporters.

Major Risk Aversion/Currency Depreciation/Dollar Appreciation

Maurice Obstfeld, IMF economic counsellor had mentioned in a videotaped statement that `they do not see a big change in the fundamentals in China compared to what is was seen six months ago though the markets are certainly very spooked by small events there that they find it hard to interpret’ He further added that the global financial markets seems to be overreacting to the oil prices drop as well as the risk of a sharp downturn in China and it was critical that China is clear about its overall economic strategy inclusive of its currency.

At a news conference Obstfeld had stated that `it is not a stretch to suggest that markets may be responding very strongly to rather small bits of evidence in an environment of volatility and risk aversion. The oil price puts strains on oil exporters, but there is a silver lining for consumers worldwide, so it is not an unmitigated negative’.

The IMF report states that continued market upheaval would also tend to help in dragging growth lower if it heads to major risk aversion and currency depreciation in the emerging markets. Besides this, other risk would comprise of further dollar appreciation and acceleration of geopolitical tensions.

China facing a new threat of credit crunch!

Almost all the economists alarmed an increase in risk every day to see a new burst in credit bubble in Asia and now things seems to be clear now. The rating agency Fitch indicates that such event without precedent in the history of the modern world could burst in China. The Tribune does not beat around the bush; and citing a threat of a credit crunch. We have discussed these things already on various times. The occurrence of this new credit crisis may in turn be hit hardly soon. The main resources for these happening are the excessive growth of bank loans to the private sector and the loans outside the formal sectors etc which lend in turn more difficult to repay by the borrower. On Friday, the Chinese interbank rates showed a sharp decline, the refinancing rate to seven days - part of the cost of interbank lending - dropping from 11.62% to 8.33%, such a move could not be obtained thanks to rumors suggesting that the PBOC (the Central Bank of China) was pressure to release the donor funds, or it can intervene directly. Earlier, panic had seized the Chinese interbank market, the benchmark rate to a record high at 13.91%. In the end, according to Bloomberg, 50 billion Yuan (about 6.15 billion Euros) were injected into the market by the central bank. The situation with less tense will prevail in recent weeks and it will continue, and the worst is still to be feared to come out. Leading analysts consider that the PBOC should maintain its policy to severely restricting access to credit for businesses and individuals. Reasons behind this are; it will help to restrict the high level of bad loans held by Chinese banks. A context is that investors fear that banks are facing difficulties increasingly strong to refinance. During the past two weeks, the rate of refinancing had indeed soared, the Chinese Central Bank stopping the injection of liquidity, despite the economic downturn. A measure which provoked a strong restriction of access to credit, draping the exchanges while blocking the lending capacity of banks. Monetary authorities and Chinese policies now want to end the very rapid credit growth in recent years. It is true that there is an emergency, leading institutions in the viewfinder smaller banks, which have increased their loans while speculating heavily. A situation that pushes the government to "clean up" the banking market, closing the valve to riskier institutions, a policy may lead some to bankruptcy. Another worrying and not least: in May, a report released by the rating agency Moody indicated that informal lending outside the banking sector in China had increased by almost 70% over the past two years ... representative now the equivalent of 55% of gross domestic product (GDP). Financial products of the informal sector amounted at the end 2012 to 29,000 Yuan (3,600 billion Euros), according to preliminary calculations by Moody's. A narrower definition of the sector excluding loans fiduciary obligations and asset-backed companies, the informal sector would weigh only 21000 billion Yuan, but still 39% of GDP. The Moody's report indicated that parallel "informal banking sector could have a leverage effect on the finances of the wider economy and amplify fears of a credit bubble. The rating agency felt that the rapid growth of informal loans increased risks to the banking system and the Chinese economy as a whole. "Given the sheer size and growth of informal banking in China, we doubt the ability of banks to guard against a significant increase in defaults" in this area, yet warned by Moody's. In March, the Banking Regulatory Commission noted that it had ordered banks to control the funds asset management more closely in order to contain the risk and increase transparency. According to Fitch, Chinese banks have somehow hidden in a second parallel balance the equivalent of 2 billion loan mechanism to circumvent the official boundaries and new regulations put in place to curb the excesses. Practices that cause the bursting of a credit bubble. Because, according to Fitch, half of the loans must be renewed every three months and hence forth at least in less than six months. According to Charlene Chu, senior director of Fitch in Beijing, "The country has duplicated the entire U.S. commercial banking system in five years." Adding that the credit is increased from 9 000 to 23 000 billion dollars since the collapse of Lehman Brothers. "All this is far worse than anything we could know before in a major economy. We do not know what will happen. The next six months will be crucial, "said Chu also. For her, "the model of growth based on credit is clearly exploding. This could fuel a massive crisis of over-capacity, and potentially a Japanese-style deflation. " According to Wei Yao of Society General, the debt level of Chinese enterprises has reached the threshold of 30% of GDP, the threshold is nothing but a typical of financial crises.