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How China can make it through hard times
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Due to the anticipated US exit from its quantitative easing (QE) program, some emerging markets have been hard hit and suffered damaging capital outflows.
Though faced with challenges against the backdrop of increasing external risks and accelerating opening-up, China’s economy, in the opinion of global observers, is competent enough to make it through the hard times as China enjoys a balanced economy both internally and externally, an adequate foreign reserve and a more comfortable policy space.
As one of the world’s major central banks, the US Federal Reserve has a powerful influence on the world economy.
The 2008 US financial crisis triggered global economic turbulences that have lasted for five years. And the QE program, especially three rounds of QE policy, has made liquidity flood around the world.
Negative effects
Under the anticipated exit of QE following continuous US economic recovery, emerging economies will inevitably suffer negative effects.
Statistics show the asset price of some emerging economies, including stocks, bonds and currency, has declined dramatically as investors are pulling massive funds out of emerging markets every week.
The Brazilian real, Indian rupee and South African rand have hit their lowest point in recent years, bringing considerable risks for economic stability.
Taking India as an example, the rupee currency exchange rate against the US dollar has devalued by nearly 20 percent, ranking the worst among major currencies globally.
Though the Indian government has implemented corresponding policies, such as import restrictions, liquidity tightening and easing in succession, the efforts have been futile. Investors are losing patience and confidence in emerging markets.
Market turbulence was a reflection of external risks, but domestic problems were also exposed.
Analysts believe that investors will withdraw part of their capital from emerging markets amid the expected decrease in liquidity, but the high-level domestic and foreign deficits plus intensive dependence on exporting raw materials will have a much bigger impact on these economies.
Li Xiaoxi, a stock manager of Principal Global Investors, said that when the US ushered in QE policies, the developed countries were struggling with the financial crisis.
At present, figures show that the US economic recovery is stabilized, so the Federal Reserve started to quit the easing and resort to contingency, which means the returns of investment in the US will go up, attracting the capital to phase out from the emerging markets to the US market, Li said.
But the root cause of the money withdrawal is the fact that some emerging markets bear the burden of high foreign red ink while the domestic financial situation is also in a quagmire.
Zhou Anjun, a researcher with BNY Mellon, believes that investors seek high returns. It is understandable that they will leave those countries that have a big hole of deficits and insufficient foreign reserves and favorable policies.
Li said some emerging countries rely heavily on exporting their reserve of raw materials. Their income drops as global demand slips and the price of raw materials slides accordingly.
In addition, the central banks of some countries were doing badly in coping with the bulk of capital flow, which made the situation worse.
Compared with currency depreciation and stumbling stock markets in other emerging powers, China’s yuan remains stable, as does the Chinese stock market.
Some observers attributed this to China’s balanced trade and fiscal policy, sustained economic growth and strong capacity to accommodate the global spill-over.
Stabilizing liquidity
Reports said the two pools — a US$3 trillion foreign reserve and a 20 percent reserve requirement ratio — that China’s central bank stressed have played a major role in stabilizing national liquidity when the dollar rises and international investments flee.
Zhou said investors consider low-quality economies more fragile to outside risks, but in comparison, China’s current account is balanced and its national finance runs better.
The latest statistics also eased the worries of some investors about China’s economic slowdown.
In July, the pace of China’s import and export growth both turned positive. The index of national industrial enterprises with sizable scale has speeded up.
In August, China’s Manufacturing Purchasing Managers Index released by HSBC and the national statistics bureau was better than expected.
At present, inflation has been kept at a low level in China, and so was its dependence on hot money.
Experts suggest China continue to push ahead with economic restructuring and expanding domestic consumption, hence making itself less susceptible to external influences.
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