China threatens global recovery

31 Aug 2015 | Author: | No comments yet »

China slump rattles global markets.

The Chicago Board of Exchange (CBOE) Volatility Index (VIX) jumped to its highest level in more than six and a half years last Monday following a broad early morning stock sell-off, triggered by the Chinese stock market plunge. NEW YORK – After a dizzying two weeks that saw a rapid plunge and rebound in equity prices, investors are looking forward to a week of economic data that may provide clarity on the likelihood of a near-term U.S. interest rate hike and help tamp down the market’s recent wild swings.New York – A volatile ride for global markets this week ended calmly on Friday even as lingering worries over Chinese economic growth and the Federal Reserve’s plans to raise interest rates weighed on stocks, but oil rebounded sharply for a second day.

THE UPWARD revision to American GDP on August 27th provided a shot in the arm to global stockmarkets, which have endured their most volatile week of trading in years.Global stock markets surged Thursday on renewed confidence in the US recovery after days of wild swings, but some observers warned of more turbulence to come over the slowing Chinese economy. Last week share prices fell by a further 16pc on the Shanghai stock market, China’s main equity market, and by 19pc on the more speculative Shenzhen market.

The American economy is now thought to have grown by 3.7% at an annual rate in the second quarter, a much higher estimate than the 2.3% that was given in an initial evaluation of the quarter. Car sales, construction spending, the Federal Reserve’s “beige book” and jobs growth may show the economy is strong enough to withstand the first rate hike in nearly a decade from the Federal Reserve, despite worries about a hard landing for China’s economy. After so much bad news about the Chinese economy, which has been a factor behind the meltdown of Chinese share indices, the US figure came as a relief to markets. That — and a production stoppage by Shell in Nigeria — sent oil prices zooming up 10 percent, their biggest single-day jump since the 2009 global economic crisis. “The US economy continues to perform on a consistent basis… (showing) that its economic recovery is sustainable… The United States is leading the global economy as it has been since late last year,” said FXTM chief market analyst Jameel Ahmad.

Global stock markets were stung by severe swings in recent weeks, stoked by concerns that a slowdown in China’s economy may be more harsh than anticipated. But after confirming a move into correction territory, the S&P 500 rebounded to score its best two-day percentage gain in over six years last week, as comments from Fed officials led some investors to believe the market turmoil and global growth concerns had diminished the possibility of a rate increase at the central bank’s September meeting. The Fed is waiting to see how data and markets unfold over the coming weeks before deciding whether to raise rates at its meeting in mid-September, Vice Chair Stanley Fischer told CNBC. Share prices on other Asian stock markets also fell sharply as investors priced in the impact of a possible Chinese slowdown on other economies in the region.

One probable casualty of last week’s market turbulence looks like being an increase in US interest rates, the first for nine years, which Fed chairwoman Janet Yellen had clearly indicated was being planned for next month. But as Washington bickered, obfuscated and delayed, Beijing decisively injected $586 billion into China’s financial system, finally turning the nation into an engine of worldwide progress. The move was the latest response by Chinese authorities, including the People’s Bank of China, to shore up the economy after they cut rates, lowered reserve requirements and injected liquidity into the banking system.

The turnaround in Chinese shares, which ended with a 5.34 percent gain, came in the last hour of trade Wednesday, sparking speculation of state-engineered buying and talk of more possible support measures from the government. “There were external funds flowing in, but it’s uncertain if it was the national team,” Shenwan Hongyuan analyst Gui Haoming said, referring to entities which trade on behalf of the government. Traders in futures markets that bet on rate increases then boosted September’s odds. “There is a narrative out there that Yellen’s Fed is looking for a reason to delay the rate hike; I don’t think that is necessarily the case,” said Brad McMillan, chief investment officer for Commonwealth Financial in Waltham, Mass. Observers recommended its distinctive political mannequin — a hybrid of authoritarian politics and market economics — for giving its leaders the power and confidence to climate the worldwide monetary storm. Stocks on Wall Street mostly edged higher at the close, as European equity markets did hours earlier, suggesting fears of Chinese contagion were overdone and that a US rate hike is not the end of the world, said Andrew Wilkinson, chief market strategist at Interactive Brokers in Greenwich, Connecticut. “It’s really a question of volatility having settled down somewhat even though it remains relatively high and people still view equities as being a decent place to be,” he said. William Dudley, president of the New York Federal Reserve, was quoted as saying last week that: “At this moment the decision to begin the normalisation process [raise rates] at the September meeting seems less compelling to me than it did several weeks ago”.

China’s inventory market is in chaos, dropping greater than 40% of its worth since peaking in June; this Monday and Tuesday, the Shanghai composite plummeted about 16%. Considerations over the rout have now eviscerated $5 trillion from international markets, as buyers start to doubt whether or not Chinese language officers will be capable of hold the world’s second-largest financial system from hitting a “onerous touchdown,” its progress decelerating to about four% or much less. “What’s occurring is an act of desperation by China and it begins dragging down different nations with it,” stated Invoice Stoops, chief funding officer with Dragon Capital, a Vietnam-based asset administration agency with 90% of its $1.15 billion in native equities. “China’s police state financial mannequin is falling aside.” Specialists, buyers and Chinese language officers agree that for China to take care of robust progress and enter the highest echelon of world monetary powers, the nation should shed a few of its dependence on its export-led financial system in favor of 1 that is pushed by consumption and providers. Some quick-and-dirty analysis of the data suggests that whenever the Fed changes rates, the Bank of England has a 23% chance of also changing rates (in the same direction) in the subsequent three weeks. Though China’s “socialist market financial system” has warmed as much as personal entrepreneurship in current many years, permitting e-commerce giants resembling Alibaba to prosper, a number of sectors — telecommunications, aviation and delivery, energy era and distribution, petroleum — nonetheless fall beneath complete state management.

We just have to play them right.” Fed Chair Janet Yellen is not attending, but her deputy, Stanley Fischer, will make keynote remarks on Saturday that could point to whether the central bank believes the global turmoil is severe enough to hold off on a long-expected hike in interest rates. The basket of global commodity prices is back to 1999 levels. “Our commodity strategists have long argued that the negative price moves in oil and commodities were primarily a reflection of excess supply as opposed to inadequate demand,” wrote Mr Oppenheimer. In January, Premier Li Keqiang stated the nation must “comprehensively deepen reforms” and “let the market play a decisive position in useful resource allocation to foster a brand new engine of progress.” China’s GDP is on monitor to increase maybe 7% in 2015, its slowest fee in many years.

But when Chinese language shares, already propped up by a government-backed bull run, started plummeting in June, authorities intervened with dramatic pressure. German bond yields edged lower, defying the sudden surge in oil, as data showed consumer prices in Europe’s biggest economy had been weighed down by falling energy costs. The South African rand touched a record low of just above R14 to the US$, triggering the SA Reserve Bank to issue a statement to the effect that the bank may consider “becoming involved in foreign exchange markets to ensure orderly market conditions”, that is effectively, to intervene to save the rand. They lent large sums of cash to stimulate shopping for, cracked down on “vicious promoting,” and suspended buying and selling in additional than 1,000 shares.

Mr Saravelos calculates that Chinese bond purchases since 2003 exceeded the Fed’s post-2008 quantitative easing and have been one of the main contributors to low bond yields worldwide. However, central bank intervention in foreign currency markets usually runs out of steam if the exodus of foreign capital is sustained and as such, can only work as a short-term measure. Capital flight from China is now running at up to $200bn a month forcing the PBoC to sell foreign bonds to prop up the value of the Renminbi. “The PBoC’s actions are equivalent to an unwind of QE – in other words, quantitative tightening (QT)”, he writes. “It is hard to be very optimistic on global risk appetite until a solution is found to China’s evolving QT”. However critics stated the federal government brought about confusion by “zigzagging” between intervening and never intervening, opening up and cracking down. A lot hangs within the stability — as China has developed and its center class has grown, the nation has grow to be the world’s largest shopper of copper, metal, aluminum, cellphones, rice, tobacco, meat, coal and a laundry listing of different merchandise and commodities.

Verified email addresses: All users on Independent Media news sites are now required to have a verified email address before being allowed to comment on articles. Among the companies Mr Chanos has short sold are oil firms Chevron and Shell, solar energy provider SolarCity, technology giant Hewlett-Packard and construction equipment manufacturer Caterpillar. Cho Shih-chao, Taiwan’s deputy minister of financial affairs, stated in an interview that China is following the trail taken by the island, going from low-quality manufacturing to extra excessive worth information business and providers. “This took 5 or 6 many years for us to succeed in this degree,” he stated. “China began in 1978 with [former leader]Deng Xiaoping and we now have to confess they’re choosing up fairly quick.” “The get together’s decision-making is absolute energy, which suggests [its]insurance policies … need to be obeyed by all totally different sectors, together with [the]enterprise group,” he stated. “So it relies upon, from what angle you take a look at this stuff.

The China phenomenon, which has seen a previously dirt-poor country grow to become the world’s second-largest economy in the space of a quarter of a century, means that the price of everything from mobile phones to furniture now costs a fraction in real terms of what it did a generation ago. State Division diplomat who labored at a Tokyo-based funding financial institution from 2000 to 2012, stated Japan’s financial system would in all probability survive the “China panic” intact. Unfortunately, much this growth seems to have been funded by debt, with total Chinese borrowing – both public and private – now standing at an estimated US$22 trillion, or almost 300pc of GDP. He famous that China’s disaster had been brewing for years. “The Chinese language banking system is much more screwed up than was Japan’s after the collapse of the ‘bubble,’ and that’s no small feat,” he stated. “Once I labored on the U.S.

It’s.” Talking in November 2008, one week after China’s Cupboard introduced its stimulus, then-President Hu Jintao referred to as the nation’s financial improvement “an necessary contribution to safeguarding worldwide monetary stability.” Even three years later, as China’s GDP developed at a blistering tempo, the state-run New China Information Company accused the U.S. of accumulating an excessive amount of debt and urged Washington to “reestablish the widespread sense precept that one ought to stay inside its means.” Throughout this week’s market decline, Chinese language state media editorials carried a strikingly totally different tone. “Proper now each nation is experiencing financial points,” stated the International Occasions, a nationalistic state-owned tabloid. Disappointing economic data which suggested that China’s industrial activity is slowing sharply could have triggered the market rout and investors voted with their feet. Not alone does this reinforce existing scepticism about the accuracy of Chinese economic statistics, it also encourages further ill-thought-out investment projects – roads to nowhere, ‘ghost cities’, even more steel mills – that will make the eventual reckoning even more painful. So can China wean itself off its investment addiction and make the transition to a consumption-led economy, or is the Communist Party incapable of managing the change? Particular correspondents Jake Adelstein in Tokyo, Ralph Jennings in Ho Chi Minh Metropolis and Nicole Liu in The Occasions’ Beijing bureau contributed to this report.

For now, the markets are assessing the Chinese authority’s actions, but China faltering economic growth still remains the fundamental challenge facing global economic growth. As this year’s collapse in dairy prices demonstrates, we in Ireland are far more dependent on the Chinese market than we might have previously imagined.

Irish farmers and food processors had been relying on China for the growth they could no longer achieve in the mature UK and mainland European markets. Allied to the fact that China has abandoned the renminbi’s dollar peg and effectively devalued its currency, this is likely to result in a deluge of cheaper consumer goods in the months and years ahead as Chinese producers seek markets for all of this new capacity coming on stream.

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