How about China’s economy tanks?

The Chinese housing bubble is at risk of bursting due to economic imbalances. If China’s housing bubble bursts, a shockwave will reverberate through its economy, causing a dramatic slowdown that will spread around the world. Utilizing a powerful new simulation tool, we forecast how a “hard landing” for China would impact the global economy.

China’s business climate is uncertain and growing more so by the day. Cheap china trade credit and a ballooning shadow banking sector in the past few years drove a massive increase in new lending, which fueled a red-hot real estate market and excess construction. As the economy cooled, the massive housing supply ramp-up resulted in high vacancy rates in some Chinese cities, which led to steep price discounts on new properties and rising default rates among smaller property developers.

Global corporations are watching China closely, wondering what will happen next. If the situation were to spiral out of control, they must be able to evaluate the impact on their business quickly and make appropriate course corrections. For instance, what does a hard landing in China mean for interest rates, trade, capital investment, commodity prices, and consumer demand, not only in China but in Europe, India, the US, and elsewhere? The more variables they can control to simulate possible scenarios, the better prepared they will be to respond to the one that actually unfolds.

Using a new econometric simulation tool called the Global Link Model, IHS is able to quantify the impact of economic shocks and regulatory changes to test a wide range of scenarios on the global economy. The model includes 68 countries and is linked to sector-specific econometric models, enabling users to see how changes in the macro-economy impact sectors and companies, as well as how changes at the micro level influence overall economic developments.

This article examines the consequences of just one scenario: a hard landing in China and the impact it would have on both the Chinese economy and the global economy. We define a hard landing as annual GDP growth for China of less than 5%. See the table at the end of this article that captures the impact on GDP growth for 15 of the largest economies in the world.