News Analysis: Can China withstand global funds shifts?

Editor's comment: Several things stand out for us in Yang Yi's analysis.

The first is that "emerging markets" (i.e. poorer countries) holding large debt and dependent upon exports of raw materials (capitalist extraction) are facing hard times ahead.

The second is that he sees the US economic recovery as "stabilized." Of course he is speaking of stability in terms of finance capital (Wall Street), and not referring to the deeper problems of the national debt, unemployment and a very weak manufacturing base.

The third thing is Yang Yi's view that the yuan and Chinese stock market have remained stable. He attributes this to China's path toward economic restructuring and expanding China's domestic market away from dependence on exports.

With regard to the third point, China has a population of 1.4 billion people compared with India's 1.2 billion and US 314 million. China's steady increase in workers wages enable them to consume domestic production, an important part of the country's economic growth. Their private-sector wages rose 14% in 2012 compared with (for example) US wages in the private sector which have stagnated or diminished for full time production workers (when adjusted for inflation and loss of benefits) and when the greatest unemployment rate in US history are considered. References here and here and here.

To sum it up, aside from their prowess in foreign markets, China's economy is stable and promising because they have a manufacturing base and are flexible enough to restructure their economy and increase workers' wages for a massive domestic market.

- Les Blough, Editor
Axis of Logic

Excerpt

"Analysts believe that investors will withdraw part of their capital from the 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.

"But the root cause of the money withdrawal is the fact that some emerging markets bear the burden of high foreign red ink while domestic financial situation is also in quagmire.

"At present, data show that the U.S. 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 United States will go up, attracting the capital to phase out from the emerging markets to the U.S. market."

"Compared with the currency depreciation and stumbling stock markets in other emerging powers, China's yuan remained stable, so was the Chinese stock market.

"Experts suggest China continue to push ahead with its economic restructuring and expanding domestic consumption, hence making itself less susceptible to external influence.

NEW YORK, Sept. 12 (Xinhua) -- Due to the anticipated U.S. exit from its quantitative easing (QE) program, some emerging markets have been hardest 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 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.

QE EFFECTS ON GLOBAL ECONOMY

As a major central bank in the world, the U.S. Federal Reserve (Fed) has a powerful influence on the world economy.

The 2008 U.S. financial crisis triggered global economic turbulences that have lasted for five years. And the quantitative easing (QE) program, especially three rounds of QE policy, has made liquidity flooded around the world.

Under the anticipated exit of QE following continuous U.S. economic recovery, emerging economies will inevitably suffer negative effects.

Statistics show the asset price of some emerging economies, including stock, bond 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 the lowest point in recent years, which has brought considerable risks for economic stability.

Taking India as an example, the rupee currency exchange rate against the U.S. dollar has devaluated by nearly 20 percent, ranking the worst among major currencies globally, and its economy became worrying.

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 loosing patience and confidence in emerging markets.

INBORNE PROBLEMS EXPOSED

Market turbulence was a reflection of external risks, but inborne problems were also exposed.

Analysts believe that investors will withdraw part of their capital from the 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, LLC, told Xinhua that when the United States ushered in QE policies, the developed countries were struggling with the financial crisis.

At present, data show that the U.S. 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 United States will go up, attracting the capital to phase out from the emerging markets to the U.S. market, Li explained.

But the root cause of the money withdrawal is the fact that some emerging markets bear the burden of high foreign red ink while domestic financial situation is also in 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.

Moreover, the central banks of some countries were doing badly in coping with the bulk of capital flow, which deteriorated the situation.

CAN CHINA BE AN EXCEPTION?

Compared with the currency depreciation and stumbling stock markets in other emerging powers, China's yuan remained stable, so was the Chinese stock market.

Some observers contributed this to China's balanced trade and fiscal policy, sustained economic growth and strong capacity to accommodate the global spill-over.

Reports said the two pools -- a 3-trillion-U.S.-dollar foreign reserve and a 20-percent RRR (reserve requirement ratio) -- that China's central bank stressed have played a big 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 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 its economic restructuring and expanding domestic consumption, hence making itself less susceptible to external influence.

Source: Xinhua