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China economy concerns: It's overdone, says Goldman Sachs

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September 11
7:37 AM 2015

Allaying fears about China's economy slowing down, Goldman Sachs says it's overblown. However, the American investment bank agreed that recently the world witnessed some negative developments.

Over 40 percent downfall in Chinese financial markets coupled with currency devaluation created tremors across the global economy. The latest downward revision of GDP growth rate for 2015 further confirms the slowdown in the economy. There's a possible recovery in markets since valuations turned inexpensive.

The world is more worried about the China factor, but Goldman Sachs shrugs it off saying it's not so much. China's financial markets tumbled 40 percent since June. A series of adverse conditions including Yuan devaluation, discouraging manufacturing numbers have been impacting the global markets in a negative way.

Adding to this, the latest downward revision of GDP growth rate for 2015 further confirms the slowdown in China's economy. 

Agreeing that some negative factors impacted the global economy, Goldman Sachs said, "global reaction was overdone." It also viewed the transition of China economy from state-controlled to a market-driven economy is going on in a normal way. 

Mark Schwartz, Chairman for Asia-Pacific at Goldman Sachs, said: "A few things have gone wrong this summer. I think the market reaction globally is overdone."

Economists have been predicting a slowdown in China's economy. China has taken massive economic reforms with the main objective of transforming it from infrastructure-based growth to consumer spending growth regime. 

China has been growing on infrastructure development including construction, housing, railways and roads for generating growth all these years. As part of reforms, China is focusing on a consumption-driven growth model. 

The China factor for the global markets is gradually easing. Global markets didn't fall the way Chinese financial markets collapse. This indicates that the world need not worry over China's economy slowing down or the currency devaluation. 

China recorded a continuous boom in the construction sector for over 10 years. It has been a major metal consumer in the world. The China's economy slowdown will definitely impact commodity prices, but may not impact global markets. 

Because the drop in commodity prices is attributed to oversupply than the easing demand in China, observe economists. 

The Chinese government's target of GDP growth rate is seven percent for 2015 and it grew at the same level during the first half of this year. But, it was less than 10 percent growth rate, at which China was growing all these years. 

However, economists feel that seven percent growth rate would be sufficient for China to create more new jobs and sustain the development. The Chinese government can also keep economy momentum at the seven percent growth rate. 

With the present growth rate, China can provide employment to the about eight million new entrants into the labor market every year. 

Goldman Sachs considers the downfall in the Chinese markets as caused by a panic on the trading patterns that sent the market nose diving rather than real fundamentals. 

Analysts feel that the drop in commodity prices, China's economy slowdown and currency crisis among emerging nations may not affect the global markets. 

Goldman Sachs recently said that it sees a possible recovery this year end. Since valuations are turned inexpensive and economy growth at seven percent would be sufficient to put the panic-stricken stock markets back on the track.

The MSCI China index tumbled by over 30 percent from its peak in April. The market is trading at 8.6 times profits, according to Bloomberg data. Chinese stock market bottomed out seven times in 2008 and 7.8 times in 2011. 

As it found a strong bottom to bounce back, this time also Chinese stock markets will make a rebound this year, forecasts analysts.

Schwartz forecasts that it would take one or two decades for China to complete the ongoing reforms program. The main task of the government will be maintaining the growth rate above six percent. 

As long as China GDP grows above six percent, there wouldn't be any disturbance for the dragon country in the implementation of reforms. 

People's Bank of China has already slashed down interest rates. The world's second largest economy's central bank has also lowered the required amount that banks need to keep on hand. This is also helping boost the growth. 

Schwartz sees China's ability to implement more stimuli as and when required for its economy as the dragon country has huge financial strength.

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