Space For Rent

Space For Rent
Thursday, August 27, 2015, Bhadra 12, 1422 BS, Zilqad 11, 1436 Hijr


How China's tremors could weaken hit economies
Published :Thursday, 27 August, 2015,  Time : 12:00 AM  View Count : 26
WASHINGTON, Aug 26: China is exporting something new to the world economy: Fear.
Global investors are quaking over the prospect of a devastating slump in the world's second-biggest economy. And they're fast losing confidence that China's policymakers, seemingly so sure-footed in the past, know how to solve the problem.
The worst-case scenario is that a collapsing Chinese economy would derail others around the world - from emerging markets in Chile and Indonesia to industrial powers such the United States, the European Union and Japan.
The free-fall in the stock markets, in the words of David Kelly, chief global strategist at JP Morgan Funds, is "Made in China."
This year, the International Monetary Fund expects China's economy to grow 6.8 per cent, which would be its weakest peace since 1990.
China, which was posting double-digit growth in the mid-2000s, is trying to engineer a daunting transition - from overheated growth fuelled by exports and often-wasteful investment to slower growth built on consumer spending.
Official numbers show the Chinese economy grew 7 per cent from January through March from a year earlier. Yet there's growing suspicion that Beijing's statistics are failing to capture the extent of the slowdown: Auto sales, electricity consumption and construction activity are "all looking very weak," Kelly notes.
"Everybody felt they could slow down to about 7pc (annual growth) and that wouldn't be the end of the world," says Sung Won Sohn, economist at California State University Channel Islands. "It looks like it's slowing down even beyond that."
Big American companies such as Caterpillar and Chevron have acknowledged the damage that China's troubles are causing them. China's troubles have also depressed several technology stocks. Shares in Apple, which has enjoyed strong sales of iPhones and other products in China, are down nearly 20pc the past five weeks.
On the surface, at least, the panic on Wall Street might seem overdone. After all, a 1pc annual drop in China's economy translates into just a 0.2pc pinch to America's economy, according to Mark Zandi, chief economist at Moody's Analytics. Likewise, a China pullback of that size would slow annual growth in the 19-country eurozone by only 0.10pc to 0.15pc, according to UniCredit Research.
That sort of slowdown is hardly catastrophic.
So why the hysteria?
For one thing, China's troubles raise doubts about whether its policymakers have the tools to keep their economy growing at a healthy pace - something that's been a reassuring constant for more than two decades.
Recently, Sohn says, "The Chinese government has not been able to control its economy and the financial market."
Beijing had cushioned its economy during the 2008-09 financial crisis by ordering state-owned banks to ply companies with loans to build roads, houses and factories. The result: an escalation of corporate debt that's now feeding the problems.
The Chinese authorities also made the misguided decision to talk up stock prices, encouraging inexperienced investors to buy shares. The idea was that companies could issue stock into a rising market and use the proceeds to reduce their debts.
But stocks rose to unsustainable levels and crashed. The government has since been trying in vain to clean up the mess. The latest trouble started Aug 11, when Beijing unexpectedly devalued China's currency, the yuan. Authorities explained that they wanted to catch up with investor sentiment, which suggested that the yuan was overvalued from having been linked to a rising US dollar. ?AP










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