Renminbi impact on Germany low, but not Chinese cyclical risks

For the average German a sack of rice falling over in China has long been none of his business. In the meantime, however, the importance of events in China for the German economy has come to be recognised. China's unexpectedly weak economic indicators and the fluctuations in the Chinese stock market have increased the scepticism over recent months about whether China will achieve the growth target set by the government  for this year of around 7%. 

The Chinese economy will stabilise following expected GDP growth of nearly 7% yoy in Q3 thanks to the support measures instigated by the government. However, German exporters are already having to contend with a marked softening of demand from China. In May exports were down 9.3% yoy, though this was partly due to a basis effect (+17.7% in May 2014, over the last 3 months +1%). But German firms manufacturing in China have also felt the weak demand, above all car makers which have faced a year-on-year decline in Chinese demand for cars of almost 1.5% during the last 3 months.

A more pronounced economic slowdown in China would be more noticeable than the devaluation. A Bundesbank simulation model estimates that if Chinese GDP growth were 2.3 pp lower than in the baseline scenario, German GDP growth would probably be 0.3 pp lower (eurozone -0.2). No negative confidence effects are simulated in the model. The slower growth is likely to materialise mainly via the export channel, which would correspond to roughly a 10% drop in German exports to China. In such an event investment activity in Germany would of course probably be affected via confidence effects. Moreover, the simulation was based on the assumption of a still-stable exchange rate. This assumption is unlikely to be maintained on account of the policy change in China. This means that the overall effect is likely to be much more pronounced than computed by the simulation.

"We do not expect any sustained weakening of the Chinese economy. The currently appreciable impact on our conservative estimates for net exports and investment in plant and machinery is thus likely to be at least partly offset. In Germany we thus remain trapped in a scenario in which robust domestic demand remains at odds with dampening effects from the global economy," says Deutsche Bank.