According to the latest World Bank report, the long-expected Chinese slowdown is on. Growth this year is predicted to drop to 7.6% from last year’s 7.7%, and is expected to fall further to 7.4% by 2016.
Part of that is good, as the Chinese government seeks more sustainable growth based on domestic demand and private business, and wants to move away from government-led development projects — it has actually set a target of 7.5% for 2014.
Structural change
But there’s likely to be some pain during the transition, with the World Bank saying “China’s growth will continue to moderate over the medium term, and the structural shifts will become more evident“.
That raises the twin spectres of China’s booming property and overheating credit markets. The latter has been buoyed by local government debt, which has been growing at around 20% per year, and that’s not sustainable for very long.
In property, some areas are already starting to see a cooling, boosting fears of a crash — and the similarities with the West’s rising debt and bubbling property markets just before the recession are looking scarier by the day.
So what does that mean for FTSE companies?
Yuppie demand
Upmarket fashion purveyor Burberry (LSE: BRBY) has seen sales in China booming as a rapidly-growing middle class sets its sights on Western luxury goods, and that’s led to a near-quadrupling of the share price in five years to today’s 1,477p — but the price has been falling back a bit since late 2013, and falling demand in China could seriously damage profits.
Banking could hurt
Then we come to two of our big FTSE banks, HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) and Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US), both of which could suffer directly from turmoil in the property and credit markets.
In 2013, more than a third of HSBC’s profits came from its home market of Hong Kong, with a further third from the rest of the Asia Pacific region — the factors that kept HSBC relatively immune from the Western crisis leave it open to threat of the same in China.
As a result, the HSBC share price has been hammered over the past 12 months, dropping 11%. And over two years it’s gained less than 20% while the FTSE has put on 30%.
The picture is pretty much the same at Standard Chartered, which earned nearly 30% of its 2013 profits in Hong Kong with only 10% coming from Europe and the Americas. Another 10% came from Africa, but a fair bit of that would have been tied to Chinese investment in the continent.
And the share price has suffered a similar fate, with an 8% drop over 12 months and a big flat zero over two years.
No big stimulus
What will the government do in the event of a crisis? At the moment, Beijing is keeping well away from direct stimulus measures, but it has dropped liquidity requirements for banks — and poor liquidity was a key contributor to the West’s meltdown!