Home' Trinidad and Tobago Guardian : August 30th 2015 Contents AUGUST 30 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
THE ECONOMIST | SBG13
Once the soundtrack to a
financial meltdown was the
yelling of traders on the floor
of a financial exchange. Now
it is more likely to be the
wordless hum of servers in
data centers, as algorithms try to match buyers
with sellers. But every big sell-off is gripped
by the same rampant, visceral fear. The urge
to sell overwhelms the advice to stand firm.
Stomachs are churning again after China s
stock market endured its biggest one-day fall
since 2007. Even Chinese state media dubbed
August 24 "Black Monday."
From the rand to the ringgit, emerging-
market currencies slumped. Commodity prices
fell into territory not seen since 1999. The
contagion infected Western markets, too. Ger-
many s DAX index fell to more than 20 per
cent below its peak. US stocks whipsawed:
General Electric was at one point down by
more than 20 percent.
Rich-world markets have regained some of
their poise. But three fears remain: that China s
economy is in deep trouble; that emerging
markets are vulnerable to a full-blown crisis;
and that the long rally in rich-world markets
is over. Some aspects of these worries are
overplayed and others are misplaced.
Even so, this week s panic contains the
unnerving message that the malaise in the
world economy is real.
China, where share prices continued to
plunge, is the source of the contagion. Around
US$5 trillion has been wiped off global equity
markets since the yuan devalued earlier this
That shift, tied to a string of bad economic
numbers and a botched official attempt to
halt the slide in Chinese markets, has fueled
fears that the world s second-largest economy
is heading for a hard landing. Exports have
been falling. The stock market has lost more
than 40 percent since peaking in June, a bigger
drop than the dot-com bust.
Yet the doomsters go too far. The property
market is far more important to China s econ-
omy than the equity market is. Property fuels
up to a quarter of GDP, and its value underpins
the banking system; in the past few months
prices and transactions have both been health-
ier.China s future lies with its shoppers, not
its exporters, and services, incomes and con-
sumption are resilient. If the worst happens,
the central bank has plenty of room to loosen
policy. After a cut in interest rates this week,
the one-year rate still stands at 4.6 per cent.
The economy is slowing, but even five per
cent growth this year, the low end of reasonable
estimates, would add more to world output
than the 14 per cent expansion China posted
China is not in crisis. However, its ability
to evolve smoothly from a command to a mar-
ket economy is in question as never before.
China s policymakers used to bask in a rep-
utation for competence that put clay-footed
Western bureaucrats to shame. This has suf-
fered in the wake of their botched---and spo-
radic---efforts to stop shares from sagging.
Worse, plans for reform may fall victim to
the government s fear of giving markets free
rein. The party wants to make state-owned
firms more efficient, but not to expose them
to the full blast of competition. It would like
to give the yuan more freedom, but frets that
a weakening currency will spur capital flight.
It thinks local governments should be more
disciplined but, motivated by the need for
growth, funnels credit their way.
Fears over China are feeding the second
worry - that emerging markets could be about
to suffer a rerun of the Asian financial crisis
Similarities exist: notably an exodus of capital
out of emerging markets because of the
prospect of tighter monetary policy in the
But the lessons of the Asian crisis were well
learned. Many currencies are no longer tethered
but float freely. Most countries in Asia sit on
large foreign-exchange reserves and current-
account surpluses. Their banking systems rely
less on foreign creditors than they did.
If that concern is exaggerated, others are
not. A slowing China has dragged down emerg-
ing markets, like Brazil, Indonesia and Zambia,
that came to depend on shoveling iron ore,
coal and copper its way (agricultural exporters
are in better shape). From now on, more of
the demand that China creates will come from
services and be satisfied at home.
The supply glut will weigh on commodity
prices for other reasons, too. Oil s descent, for
instance, also reflects the extra output of Saudi
Arabia and the resilience of American shale
producers. Sliding currencies are adding to
the burden on emerging-market firms with
local-currency revenues and dollar-denom-
More fundamentally, emerging-market
growth has been slowing since 2010. Countries
from Brazil and Russia have squandered the
chance to enact productivity-enhancing
reforms and are suffering. So has India, which
could yet pay a high price.
The rich world has the least to fear from
a Chinese slowdown. US exports to China
accounted for less than one per cent of GDP
last year. But it is hardly immune. Germany,
the European Union s economic engine, exports
more to China than any other member state
Share prices are vulnerable because the
biggest firms are global: Of the S&P 500 s
sales in 2014, 48 per cent were abroad, and
the dollar is rising against trading-partner
currencies. In addition, the bull market has
lasted since 2009 and price-earnings ratios
exceed long-run averages. A savage fall in
shares would spill into the real economy.
Were that to happen, this week has under-
lined how little room Western policymakers
have to stimulate their economies. The Federal
Reserve would be wrong to raise rates in Sep-
tember, as it has unwisely led markets to
expect. Other central banks have responsibil-
ities, too. Money sloshing out of emerging
markets may try to find its way to American
consumers, leading to rising household bor-
rowing and dangerous---and familiar---distor-
tions in the economy. So Europe and Japan
should loosen further to stimulate demand.
Monetary policy is just the start. The harder
task, in the West and beyond, is to raise pro-
ductivity. Plentiful credit and relentless Chinese
expansion kept the world ticking over for years.
Now growth depends on governments taking
hard decisions on everything from financial
reforms to infrastructure spending. That is
the harsh lesson from China s panic.
@2015 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
The great fall of China
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