China risks dominate WEF at Davos

This year’s World Economic Forum (WEF) currently taking place in Davos, Switzerland, is meant to focus on the implications of a Fourth Industrial Revolution.

Instead, it is concerns about China and its potential impact on the global economy which has so far grabbed the attention of world leaders, chief executives, academics and economists at their annual get together in the Swiss Alps.

IHS chief economist Nariman Behravesh, who is at the event, said: “Concerns about China have dominated the informal discussions. China has rattled global financial markets again, but it will probably not drag the world economy into recession.

“The recent China-induced financial volatility is the result of a nasty cocktail of major structural problems, slowing growth, and inept policies. The real growth figure is probably 4 to 5 percent growth, not the 6.9 percent claimed by the government.

“The real reason for China’s recent financial problems is the burst stock market bubble, the chaotic response of the government to the crash and the intense downward pressure on the exchange. This has spooked the markets and undermined confidence in Chinese policy makers.

“The exposure of the developed world to China is fairly small. The financial linkages are weak and the US and EU do not export that much to China. Assuming that China is able to stabilise its financial markets, then global markets will become calmer.”

Problems with emerging markets have also been exacerbated by China, according to Behravesh.

“You could say that the ‘perfect storm’ that has hit emerging markets over the past two years has become even ‘more perfect’. The damage from plunging commodity prices, capital outflows, plummeting currencies, swooning stock markets, and stagnating world trade has only been aggravated by the recent financial turmoil in China.

“Hit hardest have been mismanaged, commodity-exporting countries, such as Brazil and Russia.”

Arcadia Group head of risk and compliance Colin Campbell said that understanding the dynamics of the Chinese economy, banking system and cultures can be “difficult and complicated”.

“Political intervention with banks and indeed non-financial sector businesses at a very (micro) local level, means the ‘normal market’ management most of us are used to, may not be not present. This leads to worries regarding the sustainability of these businesses - some of which may be largely isolated from Western business, but could still have knock on effects,” she said.