China’s market missteps tripping up others

31 Aug 2015 | Author: | No comments yet »

3 reasons markets lost faith in China’s economy, at a glance.

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.Beijing’s market interventions and devaluation of the yuan, as well as waning economic indicators in China, have sent markets reeling – and prompted fresh worries about the global economy.For decades, Chinese economic policymakers have drawn praise for keeping their economy growing strongly through turbulence, such as the Asian financial crisis of 1997-1998 and the worldwide financial tumult of 2008.

Beijing: China’s economy is growing at a “reasonable” pace and, despite growing pressure, the government can handle well the risks the country faces, Chinese Premier Li Keqiang said. But while China’s slowing growth will be devastating for a number of emerging markets, and more broadly for all of Asia, there is one notable and prominent exception shielded from the ongoing fallout: India. Li said international market instability “has increased the uncertainties around the global economic recovery, and the impact on China’s financial market and imports and exports has also deepened, with the economy facing new pressure.” He defended China’s efforts to steer through a volatile period since mid-June, when China’s stock market plunged.

Indonesia, Malaysia and other commodity-rich countries, of course, have pumped endless amounts of coal and oil into China’s factories and power grid during the boom years. Those Fed officials who are anxious to raise rates said at an annual global central bankers’ conference in Jackson Hole, Wyoming that continued market turmoil may lead the US central bank to delay tightening monetary policy beyond September. State-run media talked up stocks, and individual investors responded by buying shares and igniting a 150 percent run-up in the Shanghai Composite stock index in the year through June.

Billions were wiped off the value off British pension funds and savers’ investment pots last week as fears of a slowdown in China tore through global financial markets. All of these countries made a fortune by fuelling the industrial evolution that has transformed China in recent years, while other lower-wage locales – such as Vietnam and Cambodia – have benefited as rising wages in China drove certain export-oriented industries, such as garment making, deeper into Southeast Asia. Li said recent cuts in the reserve requirement ratio (RRR), interest rates, taxes and fees and measures aimed at stabilising the market were already paying off. 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. 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 LLC in Greenwich, Connecticut. “There’s an element of throwing the baby out with the bath water.

The government sought futilely to intervene, suspending trading in hundreds of companies and banning big investors from selling stakes for six months. Everything got thrown out on that view,” Wilkinson said. “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.” The Dow Jones industrial average closed down 11.76 points, or 0.07 per cent, to 16,643.01. The intervention undermined Beijing’s pledge to give market forces a bigger say in the economy and left policymakers looking clumsy and ineffectual. Li said China would “enact more targeted and responsive macro-regulation to offset downward economic pressure, more robust reform and innovation efforts to energise the market, and more effective delivery to secure the positive momentum for growth”.

He said China needed to encourage new forms of investment and financing by local governments and businesses, such as local debt swaps and corporate bonds. Unlike Indonesia, the giant of Southeast Asia, India will actually benefit from events in China and is now heading toward higher growth rates – despite the huge challenges that accompany steering a country as vast, diverse and poor as India. And unlike commodity exporters – including Canada and Australia – India is a net energy importer, like Japan, and benefits mightily from the plummeting oil and coal prices that have followed China’s steep drop-off in demand.

In a global economy now chilled by and fearful of China’s precarious slowdown, India has a clear opportunity to “take the baton of global growth” from China, according to Jayant Sinha, India’s minister of state for finance. Since the devaluation, China has intervened to keep the yuan from falling too fast, confusing markets and renewing doubts about Beijing’s commitment to market forces. 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.

India’s economy has already edged ahead of China’s with predicted gross-domestic-product growth of 8.5 per cent in 2015, compared to China’s decelerating growth of 7 per cent – though, of course, it’s always easier to grow faster from a smaller base. China’s boom, however, was in manufacturing, which provided jobs and drastically reduced poverty rates, while India’s was in outsourcing and the services sector, which didn’t employ many, even as India’s population grew exponentially.

The US dollar gained for a fourth straight session, buoyed by calmer financial markets and generally positive US economic data that supported the notion that the world’s largest economy was on a stable growth path. Modi promised to end corruption, implement pro-business reforms, start an infrastructure-building boom and lure big manufacturers that would create jobs – just as he had done in the state of Gujarat, where he had been chief minister for more than a decade.

Modi’s globe-trotting economic diplomacy mended relations in the region, there is enthusiasm about India’s thriving technology startups and Taiwanese iPhone-maker Foxconn recently announced intentions to eventually open 12 factories there – employing as many as one million Indians. But India can at least provide a new narrative for global growth – and for hundreds of millions of Indians, China’s slowdown provides momentum that might help turn that story into reality.

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