Fears about China spreading volatility overblown: Expert

A worker taking a nap during lunch break at a Foxconn factory in the township of Longhua in Shenzhen. UBS global economist Paul Donovan says a popular misconception is that China is an engine of global growth. According to him, that honour belongs to
A worker taking a nap during lunch break at a Foxconn factory in the township of Longhua in Shenzhen. UBS global economist Paul Donovan says a popular misconception is that China is an engine of global growth. According to him, that honour belongs to the American consumer.PHOTO: REUTERS

Worries that China could spread volatility to world markets are overblown and the mainland's role as an engine of global growth is also overstated, said UBS global economist Paul Donovan.

His comments came days after the United States Federal Reserve again held off from a long-promised rate hike, citing "heightened concerns about growth in China" and "volatility in financial markets", among other reasons. "I'm not sure China was that influential in the decision, I think it has been a convenient excuse," Mr Donovan told reporters here earlier this week.

He called the Fed's comments to this effect at last week's Federal Open Market Committee a "mistake", since by giving the impression that financial markets play a role in its decisions, the central bank has effectively made itself a "hostage to financial markets".

"At a time when markets are overreacting to unreliable data, this could potentially be quite dangerous." He cited Beijing's surprise yuan devaluation last month, which many observers were quick to call the start of a "currency war".

"Economically speaking, the movement of the currency is irrelevant. This was about (China trying to gain) Special Drawing Rights membership. It was very noticeable how quickly the International Monetary Fund issued a statement in support of the Chinese decision. To my mind, this clearly signalled they were told in advance. The US Treasury as well," said Mr Donovan.

A DIFFERENT TACK

If China is going to achieve (target) growth rates of 6.5 per cent, it will have to find an alternative source of growth. They can't rely on the financial sector any more.

UBS GLOBAL ECONOMIST PAUL DONOVAN

Another popular misconception, is that China is an engine of global growth, he said. In fact, that honour belongs to the American consumer, whereas China, though large, is not as well integrated with other economies, commodity exporters aside.

"If China's growth goes up to 10 per cent, do I change forecasts in America or in Europe? I don't. I would change forecasts in Australia, but not elsewhere... China has absolutely not been an engine of global growth - this is a complete misinterpretation."

He also encouraged investors to be less fixated on the absolute number of China's economic output - subject to constant revision - and look instead at the shifts in its sources of output.

Observers may talk up the effect of the China slowdown on extending the commodities slump, but the reverse might be true, he said.

In the first half of the year, the financial services industry was a significant growth driver. But that sector will be dragging down output in the third quarter following the mid-June stock market crash.

"If China is going to achieve (target) growth rates of 6.5 per cent, it will have to find an alternative source of growth. They can't rely on the financial sector any more. Because financial services are not big users of commodities, the non-financial sector (replacement) - no matter what it is - is going to be more commodity-intensive."

Mr Donovan expects the Fed to start raising rates at a slow and steady pace at their next scheduled press conference in December.

A version of this article appeared in the print edition of The Straits Times on September 25, 2015, with the headline 'Fears about China spreading volatility overblown: Expert'. Print Edition | Subscribe