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China’s economy faces a slowdown in Gross Domestic Product (GDP) to between 5% and less than 4% next year, well below the current 7% International Monetary Fund (IMF) estimate, unless the government takes more decisive policy action – warns a report from the Overseas Development Institute (ODI), the UK’s leading think-tank on development issues.
The report Developing countries and the slowdown in China concludes that IMF forecasters are failing to fully take into account the risks in China’s financial sector at a time when its economy is already slowing down and its real estate market is in collapse.
Worryingly, this crisis would hugely impact poor countries that are highly dependent on exports of raw materials and other goods to China, threatening millions of jobs and livelihoods in Africa and other regions as exports, direct foreign investment and aid are lost.
Judith Tyson, ODI Research Fellow, said: “No country with such high levels of debt with respect to GDP as China has ever been able to avoid a banking crisis.”
“Chinese leaders are choosing to ignore mounting bad loans, anxious not to slow economic growth. But delaying facing up to the scale of problems by failing to tackle bad loans or even worse, reinflating the real estate market with “mini stimuli”, could throw the country into a prolonged slump.”
Non-performing loans (NPLs) at China’s top banks have already reached CNY 46.9 billion ($7.64bn) in the first half of 2014, double those in 2013. However, the report authors warn that bad debts may be understated and are continuing to pile up in the shadow banking sector which lies outside the regulated banking system.
Poor countries would be particularly hard hit by China’s slowdown, especially those exporting raw materials to the Asian giant. These include Mongolia (with 87% of total exports going to China), Mauritania (over 40%), Zambia (over 20%), Republic of Congo and Cameroon.
But other countries may also be affected. The Philippines, for example, is a major supplier of intermediate electronic products such as integrated circuits, processing units and chips to China. While Pakistan exports basic manufactured goods to China, its third-largest export market, including cotton yarn and fabric, leather goods and processed fish products.
The reports calls for African and other countries vulnerable to Chinese exports to take urgent measures including:
Diversifying into other sectors such as tourism in sub-Saharan Africa, and clothing and footwear manufacturing in Asia and Africa.
Expand alternative export markets, especially for primary commodity exporters, the majority of which are vulnerable to a Chinese slow-down.
Push for greater inter-regional trade, efforts currently being led by international financial institutions such as the World Bank, the Asia Development Bank and the African Development Bank.
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Note to editors:
China’s shadow banking system expanded particularly after the imposition in 2013 of constraints in bank lending designed to subdue real estate lending, allowing banks to circumvent policy directives and regulatory scrutiny. By March 2014, shadow banking system assets more than tripled since 2008, accounting for half of the increase in overall credit to the economy in 2013 – reaching 55% of GDP according to the IMF.