It’s not just China’s steelmakers and cement-mixers that are counting on new public spending to resuscitate growth. Emerging markets from Brazil to Malaysia may need what’s now becoming the biggest Chinese fiscal stimulus in years to avoid a descent into crisis.
As the world’s second-biggest economy grows at its slowest pace since 1990, Chinese officials are paving the way for new spending after four interest-rate cuts and other measures to boost lending have failed to gain much traction. The Communist Party’s Politburo last week promised “pre-emptive” policy strikes in coming months.
The shift comes just as emerging markets contend with signals from the U.S. Federal Reserve of a tightening in monetary policy by year-end that could undermine their exchange rates.
“The combination of higher U.S. interest rates and a structural slowdown in China presents a dangerous concoction for most emerging markets,” said Shweta Singh, a London-based economist at Lombard Street Research.
Malaysia and Indonesia are vulnerable due to large foreign currency borrowings and the risk of capital flight. Malaysia is also gripped by political turmoil that’s hurting consumer sentiment, while Indonesia and the Philippines have struggled to kick-start infrastructure programs amid corruption concerns. Brazil, with its own graft cases, is seeing an economic contraction.
That all raises the global stakes for a more stimulative China. While the nation’s total debt load is high, estimated at 282 percent of gross domestic product by the McKinsey Global Institute, central government debt is low, giving authorities room to spend.
“China is in an exceptional position of having the capacity to deliver an effective and justifiable fiscal stimulus program,” said Stephen Jen, a former IMF economist who is now managing partner at SLJ Macro Partners LLP in London. “Its debt level is low and the country’s need for more infrastructure spending, outside the transport sector, is still immense.”
The emerging focus is on infrastructure works like clearing shanty towns and replacing crumbling drainage pipes in the nation’s mega cities. One example: authorities are planning at least 1 trillion yuan ($161 billion) in bonds to fund construction projects, according to people familiar with the matter. Spending on that scale could help spur demand for bulk commodities like iron ore from Brazil and coal from Indonesia.
The slowdown in China to 7 percent growth during the first six months of the year from the 10 percent average enjoyed between 1980 to 2012 has thrown a spotlight on weakness across its trading partners in Asia and the emerging world.
“The blockbuster growth in China provided a massive terms-of-trade boost to many emerging market countries, which masked structural imbalances within their economies,” said Izumi Devalier, an economist at HSBC Holdings Plc in Hong Kong.
China has come to the rescue of emerging markets before. When the 2008 global financial crisis put the brakes on global growth, policy makers unveiled a fiscal stimulus of 4 trillion yuan, driving demand for imports and supporting GDP globally. Governments and central banks in emerging markets were also able to respond with their own fiscal and monetary stimulus.
But this time around, emerging economies are in a weaker position. Governments are saddled with debt and central banks have already cut interest rates.
Much depends on the nature and size of the stimulus that China rolls out. The new measures may only support growth at the margin. And commodity exporters are facing pressures beyond China’s slowdown, according to HSBC’s Izumi.
“A pick-up in China growth would be a nice shot in the arm for the global economy -- but the fundamental challenges facing these economies haven’t gone away,” she said.