If China catches a cold…

October 7, 2011

China has defied predictions of a hard economic landing for some time now so it is somewhat unsettling to see ┬áinvestors positioning for a sharp slowdown in the world’s second-largest economy.

Over the last 10 years, the world has become accustomed to Chinese annual GDP growth of above 9 percent. A seemingly insatiable demand for commodities from soya beans to iron ore has catapulted the Asian giant to near the top of the global trade table. China is the biggest trading partner for countries on nearly every continent, from Angola to Australia.

But many are now fretting that an unhappy coincidence between stuttering global demand and domestic strains in the property and banking sectors could knock Chinese growth to below 7 percent (the level commonly identified as a ‘hard landing’), with grave implications for the rest of the world.

“It used to be the case that if the US sneezes, the rest of the world catches a cold. But with the US already confined to the emergency room since 2008 thequestion is what happens if China catches a cold,” says Citi in a recent report.

Many are now preparing for the first sneeze.

Commodity exporters are expected to bear the brunt of a sharp Chinese slowdown. Investors have pared back exposure to Brazil, Russia, Chile and South Africa, citing fears over China.

On the flipside, Turkey, Mexico, Israel and India have been identified as less vulnerable.

Citi has constructed a currency index hedge against Chinese weakness, which comprises short positions in the Brazilian real, Russian rouble, Chilean peso, Korean won and Indonesian rupiah with long positions in the Turkish lira, Mexican peso, Indian rupee, Israeli shekel and Hungarian forint.

 

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