China’s economy may be on track to grow at its slowest pace in a decade, but there’s a silver lining to this: lower commodity prices may actually benefit the U.S. and Europe, just when they most need it.
“The U.S. might not be in too bad a shape because it would benefit form cheaper commodity and oil prices,” Frederic Neumann, HSBC’s Co-Head of Asian Economic Research told CNBC on Monday.
While there may be “severe headwinds” for the global economy if the Chinese government did nothing to stimulate growth, the impact will be uneven on different parts of the world, Neumann said.
The nations to be hardest hit will be Australia, Canada, Brazil and Indonesia, the economies most heavily dependent on commodity exports, he said. On the flip side, this will bring down commodity and oil prices and boost growth in the U.S. and to an extent in Europe.
“If China does hit a wall, it would be a psychological challenge at first but even though global growth will slow, the markets would soon realize that there is an asymmetric impact,” he said.
China, the second-largest economy in the world, is the biggest importer of several major commodities. A slowdown engineered by Beijing is already having an impact on the country’s appetite for resources.
Imports of copper, used in electric wiring and consumer goods fell, decreasing 18.8 percent in April over the previous year to an 8-month low. The news led to a decline in copper prices to below $8,000 per tonne on Wednesday.
The growth in China’s crude oil imports has also slowed. In April, oil imports rose 3.3 percent year-on-year to 22.26 million metric tons, the slowest pace so far this year, according to data released on Thursday by the General Administration of Customs.
While helping to ease global commodity prices, a slowdown in China could also have a painful, direct impact on global GDP growth. China is now the single largest contributor to global economic growth, the IMF said earlier this year. The nation’s contribution likely increased to 31 percent of global economic growth on average for 2010-13 from 8 percent in the 1980s, the IMF said.
In the worst-case scenario where the Chinese government did not implement stimulus measures to boost growth this summer, GDP growth of 6 percent for the country is not “inconceivable”, Neumann said.
That would be the slowest since 1999, when the Chinese economy expanded 6.7 percent, according to data from the International Monetary Fund.
Further Easing to Boost Commodities?
In a sign that China is worried about the slowing growth, the nation’s central bank on Saturday slashed its reserve requirement ratios for lenders – the third cut in six months – by 50 basis points to boost lending. The move came after data last week showed growth in industrial output was much lower than economists expected.
Nick Trevethan, ANZ Bank’s Senior Commodities Strategist in Singapore, said while his bank had cut its forecast for China’s GDP growth to 8.6 percent from 9 percent, he does not foresee the economy taking a turn for the worse. The Chinese government will likely implement further measures to prop up the economy.
“The government seems to be relatively responsive to the data,” Trevethan said. “China probably has more firepower on hand than virtually anywhere else to do something for the economy. We think the RRR (reserve requirement ratios) cut is going to be helpful.”
Saturday’s RRR cuts will add 400 billion yuan ($63.5 billion) to the banking system, he added, and if the central bank introduced relaxations on the property sector, base metal prices could rise. “That will be good for commodities bulls,” he said.
By CNBC’s Jean Chua.