China accounted for around 18% of the UK’s total motor vehicle exports in 2014, streets ahead – excuse the pun – of all other manufacturing sectors. Paper and printing saw 6% of its exports go to China, both textiles and mechanical equipment 5%, and electrical equipment 4%.
The pace of China’s growth is set to decelerate this year to the weakest in more than two decades. The government is targeting official real GDP - which typically overstates economic activity – to rise 7%, down from 7.4% in 2014. We expect official GDP will climb 6.6% but the true increase is likely to be lower.
Growing fears about the severity of the slowdown has recently triggered sharp falls in China’s, and subsequently global, stock markets. Chinese policymakers are struggling to rebalance the drivers of growth toward private consumption and away from fixed investment. Private debt surged to around 180% of GDP last year, higher than in the US, the euro zone and Japan. Fears that strong credit growth was fuelling asset price bubbles prompted China’s authorities to tighten controls on official banks, pushing up interbank lending rates. The resulting higher cost of consumer and mortgage credit has weighed on private consumption and the housing market.
Also, the tighter controls led to an increase in borrowing from shadow banks, that is, non-bank financial intermediaries such as investment management firms that provide services similar to traditional banks. The greater reliance on shadow banks, which are difficult to regulate because they lack transparency, has made China’s financial system more vulnerable to shocks.
It looks like UK manufacturers are just as anxious about what’s happening in China as they are with Greece. The results of a recent survey, which asked members how concerned they are about a sharp downturn in China, will be released in the next few days.