China’s economic growth has been unprecedented in scale & duration. But this well trodden path of investment-based growth has been seen before. China’s issue is it looks to have gone too far. In this slide pack, Marcus Wright sets out a six-point China checklist outlining what the most important developments and what they mean for the rest of the world.

1. The Dragon Economy slows -
Implications for the UK & the
world economy
Marcus Wright
RBS Economics
August 2015

2. China’s slowdown has been on the cards for a while
2
20%
30%
40%
50%
1 11 21 31Years
Investment as a share of national income (%)
China (1996-2013)
Japan (1955-1985)
S. Korea (1976-2006)
Source: Macrobond
China’s economic growth has been unprecedented in scale & duration.
But this well trodden path of investment-based growth has been seen
before. China’s issue is it looks to have gone too far.

3. 1. Downward pressure on growth
2. Depressed rates of world trade growth
The China checklist – what’s happening?
5. Strained financial links to China
4. Global interest rates likely lower for longer
3. Downward pressure on inflation
?6. An all-out credit crunch in China
?

4. China’s growth is slowing fast, however you measure it
4Source: Bloomberg, Macrobond, RBS Economics
0
5
10
15
20
1997 2000 2003 2006 2009 2012 2015
GDP Growth Proxy - Y/Y Change
GDP Y/Y Change
China appears to be slowing more than the headline figures suggest.
The growth prospects of commodity producing countries & other
emerging markets with close ties to China have been damaged.

5. A big reason why world trade is so bad right now
5
-30%
-20%
-10%
0%
10%
20%
30%
40%
1995 1998 2001 2004 2007 2010 2013
Emerging Asia Import Volume
(% Y/Y Change)
Asian Financial
Crisis
Post-Tech Bubble
Slowdown
Global
Financial Crisis
China induced
slowdown?
Source: Netherlands CPB

6. Yuan devaluation - the cherry on the disinflationary sundae
6Source: Macrobond, BIS
• Yuan devaluation has
grabbed the
headlines recently.
But it is not yet the
big story.
• China has been
exporting disinflation
for a while now. And
it is becoming more
and more of an
influence on world
prices.
-30 50
China
Indonesia
Brazil
Poland
India
Russia
Malaysia
Mexico
South Africa
Emerging Market Currencies
Increasingly
'under-valued'
Increasingly
'over-valued'
0
20
40
60
80
1971-85 1986-98 1999-2013
Causes of Inflation Variability in
Advanced Economies (%)
Common factor Chinese export prices

7. Global interest rates lower for longer
7
4
7
7
9
15
17
19
21
22
24
25
25
26
38
55
Turkey (Jan-14)
Denmark (Apr-11)
Eurozone (Apr-11)
N. Zealand (Jun-10)
N.Zealand (Mar-14)
Sweden (Jul-10)
Chile (Jun-10)
Hungary (Nov-10)
Poland (Jan-11)
Korea (Jul-10)
Australia (Oct-09)
Israel (Aug-09)
Norway (Nov-09)
Iceland (Sep-11)
Canada (Jun-10)
Number of months from 1st rate hike to
first rate cut
All of these OECD
central banks have
raised rates since
the financial crisis.
All have had to
lower them again.
Source: Bloomberg, Macrobond

8. Greece has grabbed all the headlines. It shouldn’t.
8
-
500
1,000
2005 2007 2009 2011 2013
Global Banking Sector Exposure
to Greece and China ($ Bn)
Greece
China
Source: BIS, Macrobond
-100% 0% 100% 200% 300% 400%
China
Germany
US
France
Ireland
Italy
Spain
Greece
Change in UK financial sector
exposure
(2009 - 2015)
• While the UK has
decreased its financial
exposure to most
countries since the crisis,
loans to China have sky-
rocketed.
• The world’s attention has
been focussed on Greece.
But the world’s banking
sector is 17 times more
exposed to China. And
that is before we count
exposure to Hong Kong.

9. An impending credit crunch?
9
China’s banking sector is sitting on problem loans far in excess
of official figures. Other countries’ experiences suggests it
could be in for something worse than a slowdown.
24%
32%
42% 42%
52%
60%
82%
104% 105%
0%
40%
80%
120%
Indon. -
1997
US -
2009
Japan -
1992
S. Korea
- 1997
UK -
2009
Sweden
- 1990
China -
2014
Thailand
- 1997
Ire -
2007
Rise in private sector
credit as % of GDP in
the six years to.....
Source: Macrobond, IMF

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10
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