China’s economic slowdown and a sluggish market for commodities have emerged as the top risk factors that corporate senior executives should watch out for next year.
They are highlighted in RiskMap 2016 – a new report from specialist advisers Control Risks – which stresses that this year, China’s GDP grew “at its slowest annual rate since Deng Xiaoping launched his historic reforms in 1978” – excluding the sanctions years of 1989 and 1990.
On that basis, it warns against any optimism for a sudden rebound to previous, surging levels any time in the next few years, citing figures from Oxford Economics that peg China’s growth for 2016 at a meagre 6.3%, and project it to slow even further – to around 5% – by 2020.
However, the report recommends that business leaders should “forget ‘bulls versus bears’ debates” predicting either continuity or collapse, and “focus on figuring out how a more likely ‘middle’ scenario could affect them”.
While property weaknesses and industrial overcapacity will continue to have impacts upon certain regions and sectors, the report says, a combination of ongoing policy relaxation and a resilient consumer market ought to ensure that light industry and services will remain relatively buoyant.
Furthermore, it says, China has not gone “from unstoppable growth engine to spent force”: a national savings ratio of 50% of GDP, a modest banking loan-to-deposit ratio of 80% and a structural current account surplus still provide buffers against rising debt and asset bubbles.
In the report’s introduction, Control Risks CEO Richard Fenning writes: “In China, where maintaining the external appearance of pervasive power is paramount, the wild gyrations of the Shanghai stock exchange in 2015 reminded the political establishment that there are forces at work beyond its immediate control.”
He added: “This is occurring at a time when the task of adjusting the economy to an era of lower and different growth is reaching its critical phase – a process that has been likened to performing open-heart surgery while the patient is running a marathon – making the leadership particularly nervous of triggering large-scale discontent at such a delicate moment.”
On the commodities front, RiskMap 2016 takes a cautious tone. While many analysts have predicted that the boom in raw-materials prices that occurred from 2000 onwards is a thing of the past, the report notes, perhaps the trend may be going through more of a “swoon”.
Prices of some metals and alloys could pick up again in the short term as key markets work their way through stockpiled surpluses, but in general, depressed economic conditions will continue to push against a return to soaring values.
The report predicts that “prices for energy and most commodities will stay low in 2016, but will rise gradually as the decade continues. The supercycle has not died, so much as been temporarily kicked into reverse”.
On the subject of one, particularly depressed commodity, though, the report is somewhat bleaker: “Prospects for a 2016 recovery in the price of oil are grim,” it says, “in part because of the global growth slump. This has knock-on effects on the most oil-dependent countries.”
Oil prices will continue to be suppressed, says the report – partly by the market re-entry of Iranian barrels as sanctions are lifted following the recent nuclear deal, but mostly by the “surprising efficiency gains and uniquely flexible production model” of US fracking, which will stimulate oversupply.
Further risk factors that business leaders should be aware of include: