The Bank of England warned that the health of the Chinese economy is biggest risk to financial stability in the UK than previously realized.
A new analysis from the Bank revealed that a sharp slowdown in economic growth in China will have a serious impact on the UK. If there’s a credit boom in China, Britain will suffer serious economic harm, she said, adding: “the credit boom in China is now one of the largest and longest ever recorded. Indeed, the rapid credit expansion, such as China, have typically been preceded by financial crises.”
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The warning came as the trade dispute between the US and China this week has escalated, with Donald trump threatens to impose tariffs on an additional $200 billion (£152bn) worth of Chinese goods exported to the US for $50 billion previously announced. China immediately stated that it will retaliate, raising fears of a trade war that could send the world economy into a new recession.
Bank economists predict that even a modest economic shock would knock 3% of China’s GDP and reduce UK GDP by 0.5%. They said a direct link between the UK and China through agents was very small – only 4% of UK exports to China.
But China is a key player in global supply chains, which means that the indirect effects on trade, for example through the Euro zone, are much more significant.
A full-scale financial crisis, which wiped out 10% of China’s economy will knock 1.4% off of GDP in the UK, they believe. But the full effect could be twice as worse because of the “amplification effect” that would reduce the price of the asset and the rock currency markets.
The Bank warned: “we believe that the effects through the standard channels [trade, financial relations and goods] from a modest drop in China’s GDP more than our previous estimates, primarily due to the increasing role of China in global trade.
“A strong shock that triggers the mechanisms of amplification, such as greater reaction in financial markets – could potentially double the effect of only one standard channels.
“The financial market reacted to the fall of China, this is anecdotal, and therefore, stronger impacts of exchange rates and asset prices may lead to higher demand reduction in UK exports and wealth and investor confidence.”
The Bank has calculated that the city is more exposed to China than previously thought, because of their ties with Hong Kong. He said, “unlike most countries, UK is unique as a significant direct impact on mainland China, as well as indirectly through the impact of British banks in Hong Kong.
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“Together, the risks of UK banks’ in mainland China and Hong Kong outweighs the risks for the United States, Euro area, Japan and Korea together, despite the UK economy being the 15th of the size of these countries combined.”
There is another risk that the Bank is not part of his expectation that Chinese investment in UK real estate and which he says is difficult to assess.
But he added: “it seems that the investment from Asia has grown significantly since 2010 and make up more than 40% of London commercial property in 2017, compared with 6% in 2010. And as I enter the  report on the financial stability of the Bank, London commercial property rating looks stretched”.