2016 has started with a bang for global financial markets. In the first week of trading more than $2.3 trillion were wiped off global stocks due to fears of a Chinese slowdown and a depreciation of the Chinese renminbi. The fall in the stock index was also accompanied by a record depreciation of the RMB. The RMB depreciated by 1% in the space of 10 minutes on January 7th and stood at a little over 6.59 RMB to a US $ on January 8th down from 6.51 on January 4th.One reason for the fall in the Chinese RMB was the increased tolerance by the People’s Bank of China of a fall in the RMB value which was in contrast to the strategy in 2015 when during December 2015 the PBoC sold $108 billion of its foreign exchange reserves to shore up the value of the RMB.
Chinese growth in perspective
The only bright spot during the Great Recession of 2008 was the Chinese economy. During 2008-09, a fiscal stimulus package amounting to more than $ 4 trillion renminbi was implemented even as other advanced economies were unsure about the nature of their response to the crisis that was unfolding just then. The fiscal stimulus package was implemented through the State Owned enterprises which helped China’s economic growth rebound back to its long run economic growth by 2010 and by which time its GDP contributed 50% of global GDP and a doubling of industrial production between 2007 and 2013.
This story is still beginning to unfold this calendar year and the dragon is seeing red for the first time in more than 3 decades. The supra 10% growth rates that analysts were used to while discussing Chinese growth has now been revised. Some independent estimates of economic growth have been pegged at 2.4%.Financial market analysts are already talking about the largest New Year fall in US stock markets. When a year begins with such superlative talk then the global economy and its players should be well-advised to beware of the many pitfalls that lie ahead of them in case they do not manage the economy in a proper manner. The evidence for the latter was seen in the manner in which the circuit breaker mechanism introduced by the, China Securities Regulatory Commissionthat was designedto halt trading in a bearish atmosphere proved ineffective in stopping the free tumble of the Shanghai and Shenzhen indices this past week.
Global Economy and India
Is the tumble seen in the Chinese stock market a foreboding of a bleak future for the global economy? If the 2008 economic crisis was primarily caused by US housing sector, will there be a new crisis triggered by crises in emerging markets? Both Brazil and Russia have seen their economic growth reduce by 25% and 40% respectively. Reflecting the poor prospects for the emerging market economies as a whole the MSCI Emerging Markets Index has lost 7% the past week which is the largest loss since September 2011. The interest rate hike that happened this past month had exposed the vulnerabilities of both South Africa and Turkey. In other words there is widespread concern about the impact of the Chinese Stock market on the emerging market economies. India is by far the only bright spot with stabilising currency markets and a recovering stock market. This prognosis stands despite the initial negative impacts, the depreciation of the Chinese RMB had on the Indian stock markets. However, for India to continue to remain as a beacon of performance in the world economy there are many reforms that have to be undertaken especially in the banking sector and a need to encourage investment in infrastructure that can then promote economic growth in the country. These reforms therefore assume a global importance that is over and above the earlier domestic focus that the reform debates in the country had. The reforms are important not just because they improve allocative efficiency but these are weak links in the economy. These weak links may be the point of attack for any crisis that may erupt due to a currency crisis.
As events unfold it is again too early to even speculate whether the recent trends in the Chinese stock market and the currency is localised to the domestic economy or not. Macro theory predicts how a fiscal stimulus can lead to a building up of inflationary pressures in the economy that can lead to a depreciation of the currency. The inflation rate is still low in China. December 2015 saw a year on year inflation of only 1.6% whereas the Producer Prices Inflation was down 5.5% on a yearly basis in 2015. This data therefore points more to the impending low levels of economic activity than to any evidence of the inflationary pressures that were generated by fiscal surplus.2016 may however be too late in the day for the effects of the Keynesian fiscal surplus to surface as it is a good 7 years since the 4 trillion RMB stimulus package. The riposte to that however is the lack of believability of any official data put out by the Chinese government. Again the turmoil in the US markets could be a manifestation of the tenuous nature of the economic recovery of US more than it could be reflective of any problems in the Chinese economy.
As the Chinese year of the goat ends it has been a mixed year for the economy. The goat is symbolic of prosperity and promise for the Chinese. The RMB has been officially included in the SDR list of reserve currencies adding to its global stature as an international currency of importance. However, questions are still asked about the credibility of those at the helm of Chinese economic affairs to do a good job.The next few weeks could be an interestingtest on how the last few days of the 2015 Lunar year pan out for the Chinese and the global economy.
(The author is an IAS officer of Nagaland cadre. The views expressed in his column, featured every Monday, are personal. Feedback can be emailed to vyasan_r@yahoo.com)
