China and global economi growth
Shouldone believe the message of the financial markets that the global economy is onthe edge of another downturn?
The uncertaintythat emerged in the last weeks of August began with reports of slowing growthin China. This was swiftly followed by a forty per cent decline in the value ofshares on its overinflated stock market, a two per cent official devaluation ofthe Renminbi against the US dollar, and a short-lived unrealistic decision bythe Chinese government to intervene to try to prop up share prices.
Thismonth, however, financial markets have begun to stabilise as more balancedassessments emerge of what is happening in China and to the world economy.
Notably,the International Monetary Fund (IMF) in its annual assessment ofthe Chinese economy observedthat the country was moving to a new normal, and that this would involve a ‘verysignificant’ economic transition to a more market-determined economy. Despiterecent events, the IMF said, it still expected China to experience a growth levelin 2015 of 6.8 per cent.
What however remains missing from global markets isany confidence or certainty about the way China intends to manage its economictransition, or any willingness by Beijing to explain its thinking and actions. So much so that it is likely that some G20 FinanceMinisters meeting in Turkey as this is being written, will seek to discuss withChina the implications for the world economy of what they consider a lack of transparency,and the need in future for China to better communicate its policy intentions andactions to the financial markets.
Although the Chinese government seems to regard what hasbeen happening to its stock market as a purely domestic issue, it actions suggestan emerging paradox. In a country that has said that it wishes the market toplay a greater role,it also seems to want tomanage the market’s gyrations in ways that few other nations would consider,with unpredictable external consequences. For example, its recent attempts to endspeculation by taking actionagainst domestic brokers, hedge funds or journalists who write reports deemed to encourage market instability, are now having the unintended effectof causing major international investors in China to lose confidence.
The reasons for Beijing’s actions are of coursepolitical. They respond to discontent among China’s very many smallshareholders who have expressed their opinions volubly on social media, but arealso said by sinologists to reflect internal high level differences within thecountry’s leadership that reportedly will be played out in the coming months
China, despite its size and history, does not exist ina domestic bubble and the more it seeks to consolidate its global position, themore it needs to consider the broader implications of its domestic actions.
It is hard to imagine the leadership of any othermajor nation saying almost nothing to the world at large about developmentsaffecting every global financial institution, and by extension the livelihoodor pensions of hundreds of millions of ordinary citizens globally whoindirectly have an in interest in the country’s economic fortunes. It is anissue that China’s leadership needs to address if it is to continue to generateconfidence and the respect it deserves as a world power. It will be interesting to see what PresidentXi Jinping has to say on the subject to the wider world when he visitsWashington in a few weeks time.
For the Caribbean what happens in China is ofimportance for multiple direct and indirect reasons.
In recent years it has become the source of governmentsupport, soft loans, and quasi-government and private sector investments;sometimes on a massive scale as in the case of the Bahamas, and in future in Jamaica, Antigua, Suriname, Guyana,Cuba and elsewhere in the region. It hasalso enabled the region to diversify and rebalance its internationalrelationships, better make its case on key issues such as climate change, andin some cases has enabled certain countries to find new markets for theircommodities. It may also become, as a recent visit by Jamaica’stourism minister, Wykeham McNeill to China suggested, a new source of visitors.
While there is no suggestion that China’s involvementin the region will change significantly as a result of recent developmentsthere, it is clear that the internal economic changes it is undergoing willtouch the overall international economic environment in which the regionoperates, and that Caribbean states will have to adjust.
On September 1 the IMF’s Managing Director, Christine Legarde, speaking inIndonesia mainly about that nation’s economic potential, noted three trends that suggest that agradual process of global economicadjustment is now underway.
On China she observed that the country’s economywas adapting to a new growth model. “Growth was slowing”, she said, “but notsharply, and not unexpectedly”.
While noting that the country’s transition to a moremarket-based economy would be complex, she encouraged confidence, saying that theauthorities in Beijing had the policy tools and financial buffers to managethis transition. She however warned that other emerging economies needed to bevigilant to handle potential spill-overs from China’s slowdown and theconsequent tightening of global financial conditions.
She noted too that as commodity prices come off their peak – a decline thatshe said was “projected to persist” – external demand for goods is likely to beweaker for some time to come. She also observed a third trend that could pose a risk foremerging economies.This was that as recovery strengthened in the UnitedStates, and the prospects of interest rate increases advanced, there was the possibilityof others having to address weaker capital flows, higher interest rates, andfinancial volatility.
Althoughher words were directed towards Indonesia and large emerging economies theyshould also have resonance in the Caribbean.
MsLegarde’s remarks indicate that growth in the global economy is now likely toslow, including in advanced economies such as Brazil and South Africa that withothers have powered global recovery since the financial crisis of 2007/8. This,when taken with falling commodity prices and higher interest rates in the US,suggests that the period of austerity and fiscal adjustment that the Caribbean has beenundergoing may be far from over.
DavidJessop is a consultant to the Caribbean Council and can be contacted at
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September 4th, 2015