China-inspired fear of global recession is overstated, BofA says

[HONG KONG] Whatever does cause the next global recession, it likely won't be China.

That's according to Bank of America Merrill Lynch, who gathered its top experts on the nation to mull the "34 questions about China that you were afraid to ask." They concluded the world's second-largest economy will steer clear of a hard landing and the government will contain the risks arising from its financial market turbulence. While its slowdown will weigh investor confidence, it won't cause major negative spillovers to the global economy based on an analysis of trade, portfolio and commodity channels.

"We don't view the slowing in Chinese growth as having sizable spillovers into developed markets generally, but certain economies will be harder hit than others," Michael Hanson, senior global and US economist wrote in a note.

Hardest Hit Concerns around China's impact center around its growing contribution to global growth which reached 1.3 percentage points in 2015, BofA said. Hardest hit will be major exporters to China, such as South Korea, and commodity exporters like Australia. Southeast Asian economies could feel the brunt through soured loans from borrowers that are heavily dependent on China, such as commodity exporters. In their analysis, the bank noted that neither the US nor European economies suffered a sizable contraction from the 1997 to 1998 Asian financial crisis.

"China is larger today than the collection of crisis countries back then, but what matters is not the size of the economic region experiencing a shock but the size and details of the shock itself," Mr Hanson wrote. "Today's smaller shock should be absorbed without major issues." It's a relatively upbeat outlook from the US lender, given that recent economic data continues to be mixed at best while the nation's stock exchanges and currency have had a rough start to the year. On Tuesday, China's stocks fell to the lowest levels in 13 months amid worries that capital outflows will accelerate. Outflows hit a record US$1 trillion in 2015, more than seven times higher than the whole of 2014 based on Bloomberg Intelligence data dating back to 2006. Much of that is being pinned on fears that the yuan will weaken further. The currency fell to a five-year low earlier this month, bringing its drop over the past year to more than 5 percent.

There's potential bad news on the jobs front too. China's plan to slash crude steel production capacity could eliminate 400,000 jobs and may fuel social instability, according to the state-run metals industry consultancy.

The gloomy outlook inspired billionaire investor George Soros to last week predict China's economy is headed for a hard landing that will worsen global deflationary pressures. And Willem Buiter, chief economist at Citigroup Inc., said his base case is for the world to suffer recession-like growth of less than 2 per cent this year, thanks to China.

To avoid a slump, China's government will need to push through tough reforms to the services and financial sectors, Bank of America Merrill Lynch said. And although China's battered benchmark stock index is set for further losses of around 30 per cent by year end, the overall economy should hold up, according to the analysis.

"Our baseline case for 2016 is 'muddling through' for growth," the economists said. "We think the government will manage to contain the risk from financial market turbulence and avoid hard landing."

BLOOMBERG