When Brexit happened earlier this year, most pundits brushed it aside by stating that the impact would be minimal. Certainly, the impact on US economy will likely be minimal but we are now witnessing the real impact Brexit could have on global growth. China, earlier this week, reported that its exports fell by 10% in September, after six months of rising exports.The biggest impact was 10.8% decline to UK, 9.8% drop to EU and 8.1% fall to US. The Chinese currency – the yuan has fallen 3.4% against the dollar this year after achieving reserve currency status late last year. But, even the weaker yuan failed to boost exports.
The drop in exports could be a sign of things to come in China that has largely been buoyed by government funded stimulus packages and an inflated housing market. And the Chinese consumer has played a huge role in cushioning the economic slowdown through aggressive spending on cars, travel etc. But, these figures could be misleading. Household debt in China has ballooned from just 20% of GDP in 2008 to 40% of GDP this year. Debt levels in corporations have been soaring as well. While the numbers are still well below US debt levels, financing your way to spending means any tightening of credit could have a much bigger impact on economic growth.
If Chinese exports remain weak for the rest of 2016, we could see a broad based sell off in emerging market stocks which year to date have outperformed US stock indices. Rising household and corporate debt amid overheating property market coupled with lack of recovery or further signs of bigger cracks in the Chinese economy could have meaningful repercussions on global growth.
Future Wealth View
At Future Wealth, we have remained skeptical on international markets all year. China, in particular, we feel is particularly vulnerable. We have seen the impact of housing market frenzy in US and we may be witnessing the same movie in China. As we enter tail end of 2016, we continue to be cautious and recommend for our clients minimal exposure to China and emerging markets.