China Hamstrung in Rescue Role This Time
As concerns grow that the global economy may be running into a ditch again, adding to the uncertainty is doubt that China will be able to lift it out this time around.
The plunge in global markets this week exposed anxiety about another bout of economic malaise and a 'double-dip' recession in the U.S. at a time when the euro zone is struggling to contain its long-simmering sovereign-debt crisis.
Last time around, after the collapse of Lehman Brothers, China launched a massive four trillion yuan ($622 billion) spending plan that didn't just keep growth in its own economy on track, but helped to steady the world economy at a crucial time.
The railways, bridges and buildings it built as part of its stimulus package fed demand for raw materials from resource-rich countries like Australia and Brazil. Chinese consumers kept buying things like cars and computers, helping to buoy the business of multinational corporations even as demand in developed markets fizzled. China's share of global gross domestic product rose to 9.3% last year, from 5.5% in 2006.
But China, now the world's No. 2 economy, is struggling with the costs of that last massive rescue plan: inflation, a property bubble and growing debt. Those factors will constrain the government's ability to invigorate the economy again, economists say.
'They've already had to introduce a big stimulus package a couple years ago so it's going to make it harder to go back to the same playbook again,' said Brian Jackson, economist at Royal Bank of Canada in Hong Kong.
Also hampering China's ability to help, its efforts to refocus its economy toward domestic consumption remain at a nascent level. Household spending continues to grow and wages are increasing, but because of the stimulus spending, the share of investment in China's GDP has risen, not fallen, since 2008. If demand from the U.S. and Europe falls away, Beijing won't be able to turn to its own households to pick up the slack.
On Friday, fears over the extent of problems in the U.S. and Europe roiled Asian markets. Hong Kong's Hang Seng Index dropped 4.3%, Japan's Nikkei Stock Average declined 3.7% to 9299.88, and South Korea's Kospi sank 3.7%.
Standard & Poor's removal of the U.S.'s prized triple-AAA credit rating Friday threatened to further upset markets, adding another layer of uncertainty to the global economic outlook.
Policy makers across the region have voiced concern about the darkening outlook and declared themselves ready to respond. Japanese officials said Friday before the U.S. credit-rating downgrade that they stand ready to wade back into the currency markets if needed, a day after the Bank of Japan sold yen to counter buying from investors wary of holding dollars and euros. Foreign-exchange dealers said Bank Indonesia sold dollars Friday to support the country's currency. South Korean economic officials were set to meet Sunday to discuss policy responses.
Prakash Sakpal, an economist at ING Bank, predicted Friday that central banks in China, India, South Korea, Taiwan and Thailand would hold off from further interest-rate increases and credit tightening, a shift from the anti-inflationary stance that has dominated the agenda all year.
The economies of China and other emerging economies in Asia and the rest of the world are likely better placed to weather the storm than big, developed economies like the U.S., the European Union and Japan. In many countries, government debt remains low as a percentage of GDP. Even in China, analysts estimate that China's total public debt, including local governments and various arms of the central government, remains low enough for Beijing to finance more fiscal stimulus if needed, though not at the level it did last time. And though exports remain a main driver of growth across the region, rising trade between emerging markets that is less susceptible to a drop-off in demand from the U.S. or Europe is helping reduce risk.
'We are lucky that we are not depending on the European and American economy, as our product is exported to China and India,' said Geroad Jusuf, director and corporate secretary of PT Borneo Lumbung Energi & Metal, Indonesia's largest coking coal miner. He said despite current global economic concerns, growth will be sustainable. 'We are not worried,' he said. Though he said his product will look more expensive in dollars and euros if those currencies fall in value, 'that's fine. In the future, maybe we should start leaving the dollar or the euro.'
Fu Wing Hoong, president of the Electrical and Electronics Association of Malaysia, said the immediate impact of a worsening outlook in the U.S. 'is not bad for most of our members,' as 'our products, like light fittings, for example, are exported to the Middle East.'
On Friday, Bank of Thailand Gov. Prasarn Trairatvorakul said economic problems in the U.S. were expected to have only a limited impact on Thailand's exports in the second half of this year, as exports to countries other than Europe, the U.S. and Japan─the so-called G-3─accounted for around 70% of total exports.
The plunge in global markets this week exposed anxiety about another bout of economic malaise and a 'double-dip' recession in the U.S. at a time when the euro zone is struggling to contain its long-simmering sovereign-debt crisis.
Last time around, after the collapse of Lehman Brothers, China launched a massive four trillion yuan ($622 billion) spending plan that didn't just keep growth in its own economy on track, but helped to steady the world economy at a crucial time.
The railways, bridges and buildings it built as part of its stimulus package fed demand for raw materials from resource-rich countries like Australia and Brazil. Chinese consumers kept buying things like cars and computers, helping to buoy the business of multinational corporations even as demand in developed markets fizzled. China's share of global gross domestic product rose to 9.3% last year, from 5.5% in 2006.
But China, now the world's No. 2 economy, is struggling with the costs of that last massive rescue plan: inflation, a property bubble and growing debt. Those factors will constrain the government's ability to invigorate the economy again, economists say.
'They've already had to introduce a big stimulus package a couple years ago so it's going to make it harder to go back to the same playbook again,' said Brian Jackson, economist at Royal Bank of Canada in Hong Kong.
Also hampering China's ability to help, its efforts to refocus its economy toward domestic consumption remain at a nascent level. Household spending continues to grow and wages are increasing, but because of the stimulus spending, the share of investment in China's GDP has risen, not fallen, since 2008. If demand from the U.S. and Europe falls away, Beijing won't be able to turn to its own households to pick up the slack.
On Friday, fears over the extent of problems in the U.S. and Europe roiled Asian markets. Hong Kong's Hang Seng Index dropped 4.3%, Japan's Nikkei Stock Average declined 3.7% to 9299.88, and South Korea's Kospi sank 3.7%.
Standard & Poor's removal of the U.S.'s prized triple-AAA credit rating Friday threatened to further upset markets, adding another layer of uncertainty to the global economic outlook.
Policy makers across the region have voiced concern about the darkening outlook and declared themselves ready to respond. Japanese officials said Friday before the U.S. credit-rating downgrade that they stand ready to wade back into the currency markets if needed, a day after the Bank of Japan sold yen to counter buying from investors wary of holding dollars and euros. Foreign-exchange dealers said Bank Indonesia sold dollars Friday to support the country's currency. South Korean economic officials were set to meet Sunday to discuss policy responses.
Prakash Sakpal, an economist at ING Bank, predicted Friday that central banks in China, India, South Korea, Taiwan and Thailand would hold off from further interest-rate increases and credit tightening, a shift from the anti-inflationary stance that has dominated the agenda all year.
The economies of China and other emerging economies in Asia and the rest of the world are likely better placed to weather the storm than big, developed economies like the U.S., the European Union and Japan. In many countries, government debt remains low as a percentage of GDP. Even in China, analysts estimate that China's total public debt, including local governments and various arms of the central government, remains low enough for Beijing to finance more fiscal stimulus if needed, though not at the level it did last time. And though exports remain a main driver of growth across the region, rising trade between emerging markets that is less susceptible to a drop-off in demand from the U.S. or Europe is helping reduce risk.
'We are lucky that we are not depending on the European and American economy, as our product is exported to China and India,' said Geroad Jusuf, director and corporate secretary of PT Borneo Lumbung Energi & Metal, Indonesia's largest coking coal miner. He said despite current global economic concerns, growth will be sustainable. 'We are not worried,' he said. Though he said his product will look more expensive in dollars and euros if those currencies fall in value, 'that's fine. In the future, maybe we should start leaving the dollar or the euro.'
Fu Wing Hoong, president of the Electrical and Electronics Association of Malaysia, said the immediate impact of a worsening outlook in the U.S. 'is not bad for most of our members,' as 'our products, like light fittings, for example, are exported to the Middle East.'
On Friday, Bank of Thailand Gov. Prasarn Trairatvorakul said economic problems in the U.S. were expected to have only a limited impact on Thailand's exports in the second half of this year, as exports to countries other than Europe, the U.S. and Japan─the so-called G-3─accounted for around 70% of total exports.
Comments
Post a Comment