CICC: China will crash if Greece exits the eurozone23 May, 2012, 15:38. Posted by Zarathustra
Tags: Euro Crisis
Everyone has their own opinion on what will happen to the Chinese economy if Europe blows up. That ranges from a totally delusional “nothing happen” to, well…
Given the consensus remains hugely delusional and bullish, this is probably the most bearish I have come across. From the China International Capital Corp (CICC), they believe that if Greece exits the Euro, China’s economy growth would be cut down to just 6.4% for 2012 without fiscal stimulus, which is 1.7 percentage point lower than their base case:
Financial markets have recently been under pressure due to the political turmoil in Greece, as the country’s exit from the Eurozone appears more likely. A Greek exit from the euro would have a negative impact on China’s exports and domestic monetary conditions. However, the impact may not be as strong as that of the 2008~2009 global financial crisis, given the share of exports in China’s GDP has declined and the negative impact of the European debt crisis has already been partly felt, as evidenced by China’s current economic slowdown. Assuming a Greek euro exit drags down global economic growth by half as much as the 2008~2009 global financial crisis did, China’s economic growth would fall to 6.4% in 2012, 1.7ppt lower than our baseline forecast of 8.1%.
Of course, the Chinese government, they expect, will come to the rescue:
In this case, China would need to step up counter-cyclical fiscal policies to maintain its growth target of 7.5%. The main way to stimulate the economy would be government investment, which we estimate would need to increase ~Rmb600bn. Therefore, full-year fixed asset investment would increase from the previously forecast of Rmb35.6trn (+18%) to Rmb36.2trn (+20%), and new lending would increase ~Rmb500bn to Rmb9trn.
Whether their assumption that global GDP will fall just half as much as it was in the 2008-2009 crisis is debatable, and just as debatable as whether throwing more money to the Chinese economy and build even more stuff would be helpful.