China’s frothy property market seems finally to be taking a leg down, which could be bad news not just for China, but for some of its biggest trading partners.
So who gets hammered if Chinese construction workers stop hammering? And what if the construction slowdown causes a broader economic slump in the world’s second-largest economy?
Before we get to that, a gut check is in order. While property sales are off in Chinese cities and some measures show property-price declines, a catastrophic meltdown isn’t in the cards yet. Growth in China’s gross domestic product this year is still expected to be in the high single digits, property slowdown or not.
“We are not looking for a collapse,” says Jonathan Anderson, economist at UBS. “We are looking at three months of sequential rolling off and numbers stabilizing. We are not in the ‘run for your life’ camp. But the numbers are starting to roll and this is the time you watch.”
But if things do turn out badly, as some think they will, who gets hurt outside China?
The first set of economies affected would be big commodity producers that sell to China or rely on China’s demand indirectly. Top of that list would include Australia (coal, iron ore, natural gas), South Africa and Brazil (industrial metals) and Chile (copper). Southeast Asian countries such as Thailand and Vietnam supply rubber, and Indonesia provides a lot of coal.
Those countries’ currencies, such as the Australian dollar, Brazilian real and Chilean peso, which are at record or multiyear highs, would pull back.
Another impact of a China hard landing would be oversupplies in China of steel, machinery and other basic-material items, says Mr. Anderson. During a brief economic slowdown last decade, China reduced a glut by exporting those items at very low prices, which triggered a global drop in steel prices and political standoffs with the U.S. and Europe, where steel industries have bristled in the past over Chinese steel’s flooding global markets.
China’s neighbors South Korea, Taiwan and Japan, which supply heavy machinery for construction and manufacturing, would also get hit.
Higher on the value chain would be countries that produce the high-tech goods needed for China’s burgeoning manufacturing industry, especially Germany, which relies heavily on exports to drive its economy.
“Germany has what China needs,” says Luca Silipo, Hong Kong-based Asia economist for French investment bank Natixis. “Ten years ago China could produce on its own because they were focusing on the low end of consumer goods without any technology. But now technology is a necessary because they are trying to go up the ladder. In this sense Germany’s role has been enhanced by the development of China.”
China has been among Germany’s fastest growing export destinations, with exports growing 44% in 2010. To keep things in perspective, China is still only its seventh largest export market, behind France, the U.S., the Netherlands, the U.K., Italy and Austria.
While the U.S. consumes a huge amount of China’s exports, China doesn’t demand a similar order of magnitude of U.S. goods, outside of a few key areas such agricultural commodities and airplanes. And even then, the U.S. economy is mostly domestically driven, so a drop in exports to China would have an effect only on the margins.
“If China falls hard, Europe and U.S. would have some impact but not dragging it down into double-dip territory” says UBS’s Mr. Anderson.
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