If you ask billionaire investor George Soros, China’s economic slowdown and recent market turbulence could trigger a global financial crisis on the scale of 2008. The International Monetary Fund is sounding unhappy too, warning of substantial risks to the world economy as a result of China’s weakness and record-low raw materials prices.
“If these key challenges are not successfully managed, global growth could be derailed,” the IMF said in an updated outlook. It cut its forecast for global growth in 2016 and 2017 by 0.2 points respectively, to 3.4 percent this year and 3.6 percent next.
But leading German fund managers regard that pessimism as exaggerated. They’ve grown more cautious in their investment strategies, but are keeping a lookout for bargains. And they think Mr. Soros has got it wrong with his fears that China’s restructuring problems and devaluation of the yuan could trigger a new stock market crisis.
“George Soros appears to be ignoring the effect of the years of bond purchases by the U.S. Fed as well as the most recent measures of the ECB,” said Frank Hagenstein, chief investment strategist at fund management group Deka, referring to the European Central Bank’s decision in December to cut interest rates deeper into negative territory, and to its bond-buying program.
Björn Jesch of Union Investment, the asset management arm of Germany’s cooperative banking sector, said: “We’re miles off a systemic crisis at the moment.” But China’s government and central bank needed to act now to ensure that the exchange rate keeps the economy competitive, he added.
We’re miles off a systemic crisis at the moment. Björn Jesch, Union Investment
The dogged optimism may come as a surprise given the exposure of Germany’s key auto sector to China, the world’s biggest auto market.
China accounts for just 6 percent of German exports, but a sustained Chinese slowdown would have knock-on effects on the rest of the world, indirectly hurting German trade with other countries especially in engineering and the auto sector, economists said.
But asset managers in Germany are confident that the Chinese government will be able to steer the slowdown.
Stefan Kreuzkamp, chief strategist at Deutsche Bank’s asset management unit Deutsche AM, predicted that there will be further yuan devaluations, albeit at an orderly pace, to alleviate the burden on Chinese companies with dollar-denominated debt.
Given the size of the country’s currency reserves, that should prove easier to achieve than recent efforts to stabilize the Chinese domestic stock market, where Mr. Kreuzkamp expects further volatility. But the turbulence won’t pose major threats to the world economy, he said.
Ingo Mainert, a senior strategist at Allianz Global Investors, said the recent declines in Chinese stock markets were just a “correction” after markets and asset valuations had previously decoupled from economic fundamentals.
China’s stock market has fallen by about a fifth since the beginning of the year due to continued fears of weak growth, and this has put international markets under pressure.
Growth in the world’s second-largest economy reached 6.9 percent, the weakest expansion in a quarter of a century, according to official data released Tuesday. The slowdown worsened towards the end of the year, with disappointingly weak increases in industrial production and retail sales.
But investors in Germany are confident that the government will keep on cutting interest rates, and they expect markets to calm down. The economic slowdown is priced in and will likely proceed in an orderly fashion, said Mr. Hagenstein of fund group Deka.
Mr. Kreuzkamp at Deutsche Bank predicted that world share prices would remain underpinned by continued growth in global GDP and in corporate earnings. After all, the IMF, despite having cut its forecast, still sees world economy growing by well over 3 percent both this year and next.
Union Investment has scaled back its equity holdings while Allianz GI, Deutsche AM and Deka are on the lookout for new investment opportunities, for example in European stocks.
Philipp Hauber, an economist at the Kiel Institute for the World Economy, expects Chinese growth to slow to 4 or 5 percent on a lasting basis. But he predicted that the Chinese government will resort to economic stimulus to prevent a sharp downturn, not least because it wants to avoid social unrest that could result from a recession.
The IMF is more pessimistic about China’s growth outlook than the Chinese government which expects 7 percent growth this year. The IMF forecasts growth to slow to 6.3 percent in 2016 and 6 percent in 2017.
China’s president, Xi Jinping, has coined the slogan “new normality” to describe the growth decline and the structural change from an export-dependent economy to one driven by domestic demand.
In a special meeting of officials on the state of the economy he called for reforms to be implemented swiftly and said the government must “stabilize short-term growth,” state news agency Xinhua reported. But he added he was optimistic overall regarding economic fundamentals.
Anke Rezmer is based in Frankfurt and covers the investment banking sector. Norbert Häring, who covers monetary policy and financial markets, Donata Riedel who covers economic policy, and Stephan Scheuer, China correspondent, contributed to this article. To contact the author: [email protected].