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China’s economic slump raises fear

CHICAGO, Ill. — The deceleration of China’s economy is raising alarm bells in agriculture circles.

China’s gross domestic product (GDP) is expected to grow by 6.8 percent in 2016 and 6.4 percent next year.

That is the envy of many countries around the world but it is well below the double-digit growth China experienced during much of the 1990s and early 2000s.

China’s debt has risen to $30 trillion or three times its GDP. An estimated 20 to 35 percent of that debt is unserviceable.

“That makes the financial crisis here look tame,” Thomas Scott, chief executive officer of Informa Economics, told U.S. farmers attending the 2016 DTN Ag Summit.

Capital is flowing out of the country, the currency continues to weaken and its workforce is aging. China has injected trillions of dollars of stimulus into the economy.

“That can’t go on forever.”

Scott thinks China is on a path towards five percent annual growth in GDP.

“The deceleration of China’s economy is a concern,” he said.

The big question is will there be a hard or a soft landing on the path down to five percent economic growth? In other words, is China heading for a crash?

That would have huge ramification for agriculture since China is a top buyer of many of the world’s crops and meat products.

Scott believes it will be a soft landing, although there will undoubtedly be bumps along the way. He thinks China’s government is better equipped to handle a decelerating economy than western governments.

“Because they have such a tight central control on things and there is an awareness that this is going on, they can take actions to manage it,” he said.

Those actions include getting rid of excess industrial capacity, reducing inventory and stocks, particularly in the real estate market, limiting speculative purchases in commodities and real estate and reducing corporate costs.

Scott said people started getting worried about China when there was a meltdown in the Shanghai Stock Exchange composite index in the summer of 2015 and again in January 2016.

He is not too concerned about the stock market crashes because stocks are narrowly owned in China so the collateral damage is limited.

What does keep him awake at night is China’s real estate bubble. The government initially encouraged citizens to buy multiple homes or apartments, which led to real estate prices rising 20 to 30 percent per year in some markets.

What is happening in China is eerily reminiscent of the United States housing bubble.

“If this unravels that will truly ripple through and affect a lot of people,” said Scott.

The good news for the agriculture sector is that 168 million Chinese are expected to move from rural areas to urban centres between now and 2025. Those people will be eating more meat, which in turn increases feed grain and oilseed demand.

A big wild card with China is how it responds to the policies of a Donald Trump presidency.

Scott said many voters who elected Trump want him to follow through on his campaign pledge to impose a 45 percent tariff on imported Chinese manufactured goods. China could retaliate by imposing tariffs or phytosanitary obstacles on U.S. agricultural commodities.

“It’s going to be a discussion and a debate and agriculture is going to have to be front and centre to make sure their voice is being heard,” he said.

Another Trump campaign promise to reject the Trans-Pacific Partnership agreement could create an opening for China to negotiate bilateral trade agreements with Asian members of what now appears to be a defunct TPP pact.

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