Details

GCC and global economies hope for Chinese economic

recovery in 2016

 

There is a growing sense of unease across global markets about what 2016 has in store. Many countries are struggling to stave off a feared return to the dark days of the 2008 financial crisis and, in particular, China seems to be trying unsuccessfully to prop up markets that seem determined to fall precipitously. The situation in China is worrying for all of the world’s economies, not least for those with direct interests in the Chinese manufacturing story or those for whom China represents a major trading partner. The downward pressure on energy prices that a slowing Chinese industrial sector exerts has lately been well documented, and today we are seeing exactly what the repercussions are for Gulf states. It is no wonder, then, that it is to China that the world’s financial experts look as they try to make economic forecasts for the coming months.

In 2015, we saw the Chinese economy retract by some 6.9 percent, the worst retraction in 25 years. Across most sectors in China, we today see economic strain making itself felt: despite slowed industry, for example, in many domestic Chinese markets we see surplus, in real estate, we see supply outstripping demand, and in export trade we see volumes falling off. The Chinese financial services sector is also struggling due to slowed growth throughout the Far East. China’s status as a major engine of growth for the global economy, thanks to its normally insatiable appetite for raw materials, means that any sort of Chinese slowdown augurs badly for global markets. The knock on effects of Chinese recession can cause first ripples and then shockwaves of panic in all the world’s major markets.

Al-Mazaya Holdings Weekly Real-Estate Report states that the challenge for Chinese leaders in 2016 will be to steer the country’s economy away from reliance on heavy industry, debt markets and export, and to instead allow domestic supply and demand curves to once again hold sway in traditional Chinese markets. Certainly, we are seeing some evidence of this transfer taking place, or that efforts to effect it are being made. In 2015, fifty percent of GDP was generated by the financial services sector in China while infrastructure expenditure increased by ten percent.

Al-Mazaya Holdings Weekly Real-Estate Report fears that should the Chinese economy continue to struggle, the global economy in 2016 could go down a hole deeper than that encountered in 2008. The Chinese economy has become a mainstay of global financial stability and wealth creation. It is the world’s second largest importer of oil, importing more than six million barrels per day. Only America imports more. The ramifications for the global economy of depressed oil prices may not be obvious, but they are real.

Another economic issue to worry governments the world over is the dollar volatility we have seen over the course of the last year, and the consequent exchange rate volatility for various currencies against the dollar. The temptation for the American Federal Bank to hike interest rates as a safeguard against negative Chinese data grows by the day, but doing so carries significant risk.

Al-Mazaya Holdings Weekly Real-Estate Report points out that America is under pressure to reduce Chinese exports in light of the weakening yuan. After the 2008 financial crisis, America requested that the Chinese government strengthen the yuan to support America’s export trade, but today the Chinese government no longer has this option and is instead trying to artificially support a currency that, one suspects, would plunge if left to its own devices. In fact, it could be argued that China would be better off for the long-term if it allowed its currency to weaken, thus more accurately reflecting domestic economic reality. Today, Chinese exporters are being undercut by Asian competitors thanks to the artificial strength of the yuan.

However, Al-Mazaya Holdings Weekly Real-Estate Report does not anticipate any imminent relaxation of the measures that have been put in place to support the yuan, not least because doing so would have a domino effect throughout Asian markets – effectively, a currency war – that would serve no one, least of all Chinese companies half submerged in debt. Allowing the yuan to slide further would also undo immediately the work the Chinese government has taken in recent years to make it a major global reserve currency.

Over the last decade, we have seen a marked increase in Chinese investments overseas, particularly into manufacturing industries. Today, Chinese overseas investments are another reason that the global economy should be concerned about the country’s long-term economic viability. Chinese overseas investments are important creators of wealth and employment throughout the West and the Middle East. In 2015, alone, Chinese overseas investment totalled several billion dollars. Were these investments to be stopped, or sold, the repercussions for European, African, Arab and American economies would be seismic. Today, the Chinese government incentivises Chinese companies to penetrate foreign markets. Should this change, markets would quickly become spooked.

In recent years, we have seen much Chinese investment into Gulf markets. To date, China investment into the UAE economy exceeds AED200bn. The UAE is China’s largest export market in the Gulf and also its largest commercial partner in the region. In the last decade we have seen many initiatives from the UAE government to increase Chinese investment into Dubai and also to increase the sharing of knowledge.

Saudi Arabia, too, has benefitted from Chinese investments – today China is the kingdom’s most valued commercial partner. At the end of 2014, mutual Saudi-China trade had reached some US$69bn. Currently, some 150 Chinese companies are active in Saudi, most focussed on the hydrocarbon sector.

Al-Mazaya Report concludes by stressing that Gulf states should look where possible to support the Chinese economy over the coming year given the interlinked nature of Chinese and Gulf businesses and also the dependence of several Gulf states on Chinese purchasing power, particularly in the oil markets. Chinese investments throughout the Gulf are important generators of wealth and employment opportunities – should Chinese investment into the region cease the effect would be widely felt.  It is the the interests of everyone, all over the world, that the Chinese economy recovers and continues to grow in 2016.