China and global economic growth

Should one believe the message of the financial markets that the global economy is on the edge of another downturn?

The uncertainty that emerged in the last weeks of August began with reports of slowing growth in China. This was swiftly followed by a forty per cent decline in the value of shares on its overinflated stock market, a two per cent official devaluation of the Renminbi against the US dollar, and a short-lived unrealistic decision by the Chinese government to intervene to try to prop up share prices.

This month, however, financial markets have begun to stabilise as more balanced assessments emerge of what is happening in China and to the world economy.

Notably, the International Monetary Fund (IMF) in its annual assessment of the Chinese economy observed that the country was moving to a new normal, and that this would involve a ‘very significant’ economic transition to a more market-determined economy. Despite recent events, the IMF said, it still expected China to experience a growth level in 2015 of 6.8 per cent.

What however remains missing from global markets is any confidence or certainty about the way China intends to manage its economic transition, or any willingness by Beijing to explain its thinking and actions.  So much so that it is likely that some G20 Finance Ministers meeting in Turkey as this is being written will seek to discuss with China the implications for the world economy of what they consider a lack of transparency, and the need in future for China to better communicate its policy intentions and actions to the financial markets.

Although the Chinese government seems to regard what has been happening to its stock market as a purely domestic issue, it actions suggest an emerging paradox. In a country that has said that it wishes the market to play a greater role, it also seems to want to manage the market’s gyrations in ways that few other nations would consider, with unpredictable external consequences. For example, its recent attempts to end speculation by taking action against domestic brokers, hedge funds or journalists who write reports deemed to encourage market instability are now having the unintended effect of causing major international investors in China to lose confidence.

The reasons for Beijing’s actions are of course political. They respond to discontent among China’s very many small shareholders who have expressed their opinions volubly on social media, but are also said by sinologists to reflect internal high level differences within the country’s leadership that reportedly will be played out in the coming months

China, despite its size and history, does not exist in a domestic bubble and the more it seeks to consolidate its global position, the more it needs to consider the broader implications of its domestic actions.

It is hard to imagine the leadership of any other major nation saying almost nothing to the world at large about developments affecting every global financial institution, and by extension the livelihood or pensions of hundreds of millions of ordinary citizens globally who indirectly have an in interest in the country’s economic fortunes. It is an issue that China’s leadership needs to address if it is to continue to generate confidence and the respect it deserves as a world power. It will be interesting to see what President Xi Jinping has to say on the subject to the wider world when he visits Washington in a few weeks’ time.

For the Caribbean what happens in China is of importance for multiple direct and indirect reasons.

In recent years, it has become the source of government support, soft loans, and quasi-government and private sector investments; sometimes on a massive scale as in the case of the Bahamas, and in future in Jamaica, Antigua, Suriname, Guyana, Cuba and elsewhere in the region. It has also enabled the region to diversify and rebalance its international relationships, better make its case on key issues such as climate change, and in some cases has enabled certain countries to find new markets for their commodities.   It may also become, as a recent visit by Jamaica’s Tourism Minister, Wykeham McNeill to China suggested, a new source of visitors.

While there is no suggestion that China’s involvement in the region will change significantly as a result of recent developments there, it is clear that the internal economic changes it is undergoing will touch the overall international economic environment in which the region operates, and that Caribbean states will have to adjust.

On September 1 the IMF’s Managing Director, Christine Lagarde, speaking in Indonesia mainly about that nation’s economic potential, noted three trends that suggest that a gradual process of global economic adjustment is now underway.

On China she observed that the country’s economy was adapting to a new growth model. “Growth was slowing,” she said, “but not sharply, and not unexpectedly.”

While noting that the country’s transition to a more market-based economy would be complex, she encouraged confidence, saying that the authorities in Beijing had the policy tools and financial buffers to manage this transition. She however warned that other emerging economies needed to be vigilant to handle potential spill-overs from China’s slowdown and the consequent tightening of global financial conditions.

She noted too that as commodity prices come off their peak — a decline that she said was “projected to persist” — external demand for goods is likely to be weaker for some time to come. She also observed a third trend that could pose a risk for emerging economies. This was that as recovery strengthened in the United States, and the prospects of interest rate increases advanced, there was the possibility of others having to address weaker capital flows, higher interest rates, and financial volatility.

Although her words were directed towards Indonesia and large emerging economies, they should also have resonance in the Caribbean.

Ms Lagarde’s remarks indicate that growth in the global economy is now likely to slow, including in advanced economies such as Brazil and South Africa that with others have powered global recovery since the financial crisis of 2007/8. This, when taken with falling commodity prices and higher interest rates in the US, suggests that the period of austerity and  fiscal adjustment that the Caribbean has been undergoing may be far from over.