Shenzhen Stock Exchange (blake.thornberry, CC BY-NC-ND)
Poland’s economic growth remains pretty strong and projections, though downsized, are also not insignificant, ranging from 3.3% to 3.8% for 2015. But with deflation persisting, manufacturing weaker than expected over the summer, exports stagnant, and the outlook for the zloty uncertain, the knock-on effects of the situation in China are far from clear.
“The impact of the Chinese ‘crisis’ has both positive and negative effects on the Polish economy,” said Piotr Bujak, bank PKO BP’s Senior Economist.
“The positive effects are related to the fact that Poland, as the vast majority of EU economies, is a net importer of commodities. Thus, while many non-EU, commodity-dependent Emerging Markets (eg. Russia, Brazil, Venezuela, South Africa) are suffering from a sharp drop in commodities prices, Poland is benefiting from it. For instance, the sharp drop in fuel prices improves the real incomes of households, supporting consumption demand. The most important negative effect of the Chinese ‘crisis’’ would be weakening of the German economy, which is by far the largest trading partner for Poland (over one-fourth of Polish exports goes to Germany and much of that is re-exported to major global markets, including China),” Bujak said.
Shares fell sharply on the Warsaw Stock Exchange over the summer as the first effects of the emerging crisis in China made their way to Europe.
The omens didn’t look very good in the immediate-term. One of Poland’s worst hit companies was copper firm KGHM, down at one point 16 percent. The firm is one of the world’s leading copper producers, and with the Chinese economy slowing, demands and hence also prices for copper, amongst other commodities, is falling. The coal miner Bogdanka fell 29 percent.
“The imbalances have been there to see for many years, the US effectively caught in the trap of borrowing to pay for cheap Chinese products that help hold down domestic inflation,” Aleksandra Walesa, an analysts at Warsaw-based fund KFK, said. “The tradeoff was beneficial for both US consumers and Chinese producers. The US would run a huge trade deficit, the Chinese a huge surplus. so, as long as Americans could borrow, any investment, even sub-prime mortgage lending, was worth a shot. Then came the bubbles, and the bursts and the bailouts. The cracks in the model were papered over and we all went back to reality, mostly austerity and cuts and quantitative easing, the printing of huge sums of money that never arrived in the real economy, but found their way into banks’ hands and then much of it also into the Chinese equity market. Property developers in China also went on a building binge using cash borrowed from US banks. The model was based on a China that used exports to fuel growth. This in turn increased dependency on a Chinese monetary regime that needed the Chinese economy to growth at least 8 percent per year just to standstill.”
A report by credit rating agency Moody’s said a devaluation of the yuan by more than 10 percent would raise the cost of financing Chinese debt to unsustainable levels – and property developers would be the first to start going bust. So far, the devaluation amounts to about 3 percent.
The zloty seems relatively well insulated so far. But after China’s central bank cut rates in July cash started moving in the direction of safe havens around the world and Polish government bills could look less attractive after the NBP cut its own rates to historic lows in the summer. On the other hand, China’s slowdown is helping drive down oil prices and that will help maintain lower price inflation in Poland, offering some policy wiggle room for an economy that is still – after all – expected to grow by over 3.5 percent this year.
Polish bonds outperformed all major emerging markets in the aftermath of the yuan devaluation, driving yields to the lowest relative to Hungary in August.
As Bloomberg accurately noted: the willingness of investors to suspend concern over Poland’s October election may say more about the dearth of opportunities to escape the fallout from slowing Chinese economic growth than any upsurge of confidence in Poland’s incoming administration.
