China faces slowing economic growth and rising debt. As such, Chinese policy makers are faced with a delicate challenge: how to hold back credit growth without causing too much economic heartache.
“Growth has slowed but leverage, that is credit or debt, continues to rise relative to GDP,” Andrew Tilton, Goldman Sachs' chief Asia Pacific economist told reporters at a press briefing in Hong Kong on Tuesday. “The challenge facing policy makers is to slow down that growth in debt without slowing down GDP growth too much,” he added.
China's economic growth has been slowing thanks largely to weak export growth. Faced with their own problems since the global financial crisis of 2008, the US and Europe have been buying fewer Chinese exports. “Export growth has slowed quite significantly,” said Tilton. “The end markets that China sells to are not growing as quickly.”
At the same time, the renminbi has appreciated and domestic wages have risen, making China's exports less price-competitive.
Despite an improved economic outlook in the US and Europe, China's export growth won't be returning to the 15% to 20% annual clip seen in the not-too-distant past, Tilton said.
A Reuters poll of 19 economists published Monday indicated that China's export growth rate likely slipped to 2% in January.
Despite concerns about a possible economic hard landing in China, Goldman Sachs has a growth forecast for China at 7.6% for 2014, which is close to the consensus and only marginally lower than the 7.7% rate recorded in 2013. This assumes that China's policy makers are aiming for a growth rate of about 7.5%.
But Tilton warned that "if the external environment [was] worsening and policy makers wanted to slow credit growth, then 7.5% [growth] might be quite challenging."
Emerging markets rout
Away from China, Goldman Sachs' economists expects capital flight from emerging markets -- a key theme in 2013 and so far in 2014 -- to continue but anticipate some stabilisation. After performing strongly in previous years, emerging markets have experienced a rout as growth in the US and Europe has picked up and as the US Federal Reserve has signalled a gradual end to its super-easy monetary policy, prompting investors to bring back funds to developed markets.
"That period of emerging market underperformance is going to continue although it may be less uniform and more moderate," said Dominic Wilson, chief markets economist at Goldman Sachs at the briefing.
The bank expects continued improvement in the US economy and is forecasting growth of about "three percent plus" over the next couple of years. In line with that improvement, it also expects the US dollar to appreciate in 2014.
"We think the dollar will continue, on balance, to strengthen against a fairly large number of emerging market currencies [and] against the commodity currencies [of] Australia and Canada," Wilson said.