Greater macroe­co­nomic and fi scal sta­bil­ity mean China is in a bet­ter po­si­tion than other emerg­ing economies to with­stand eff ects

China Daily (Hong Kong) - - COMMENT - The au­thor is a re­searcher at the In­ter­na­tional Trade and Eco­nomic Co­op­er­a­tion In­sti­tute of the Min­istry of Com­merce.

The United States Fed­eral Open Mar­ket Com­mit­tee an­nounced Wed­nes­day that it will start draw­ing down its multi­bil­lion-dol­lar quan­ti­ta­tive eas­ing poli­cies in 2014, ta­per­ing its monthly pur­chase of Treasurys and Trea­sury mort­gage-backed se­cu­ri­ties by $10 bil­lion in Jan­uary. Since the real econ­omy in the US is steadily re­cov­er­ing now, it was only a mat­ter of time be­fore the Fed de­cided to ta­per it off. But, this an­nounce­ment took many an­a­lysts by sur­prise. In fact, it had only a mild ef­fect on the fi­nan­cial mar­kets with no large-scale fi­nan­cial tur­bu­lence tak­ing place. This was not what Fed Chair­man Ben Ber­nanke im­plied would be the case back in May when he first floated the ta­per, so it will fur­ther strengthen the Fed’s con­fi­dence that it can fi­nally bow out of its quan­ti­ta­tive eas­ing pol­icy.

How­ever, while the shocks to­wards de­vel­oped coun­tries can be iso­lated. Those in­vestors who have ex­pe­ri­enced tur­moil in emerg­ing mar­kets this year will still worry about the im­pact of the Fed’s pol­icy change, and the mild mar­ket re­sponse this time just shows that the im­pact will slowly emerge like the prover­bial “slow-boil­ing frog”.

For the world econ­omy, the di­rect ef­fects will be a faster fall in the prices of pri­mary com­modi­ties and the flow of cap­i­tal out of emerg­ing economies to­ward de­vel­oped coun­tries.

Those emerg­ing coun­tries and de­vel­oped coun­tries with abun­dant re­sources, such as Aus­tralia and Canada, will likely suf­fer the most. More im­por­tantly, for the emerg­ing economies, it may re­verse their rise in the in­ter­na­tional po­lit­i­cal and eco­nomic sphere and ag­gra­vate the po­lar­iza­tion among them.

When it is comes to China, the good news is the Fed’s pol­icy change may present China with some ad­van­tages be­cause China’s eco­nomic struc­ture is quite dif­fer­ent from other emerg­ing economies. China is the world’s largest man­u­fac­tur­ing econ­omy and one of the big­gest im­porters of pri­mary com­modi­ties. So the fall­ing prices of pri­mary com­modi­ties will ben­e­fit the Chi­nese econ­omy. The other emerg­ing coun­tries are highly de­pen­dent on ex­port­ing their com­modi­ties to boost their economies.

More­over, China’s macroe­co­nomic sta­bil­ity is much bet­ter than most ad­vanced economies and other de­vel­op­ing coun­tries, such as the other BRICS coun­tries (Brazil, Rus­sia, In­dia and South Africa). For one thing, China has main­tained a sur­plus in both its com­mod­ity trade and its cur­rent ac­count for more than 20 years, ac­cu­mu­lat­ing huge-scale for­eign ex­change re­serves, which can guar­an­tee the Chi­nese cur­rency greater sta­bil­ity. For another, the fis­cal sit­u­a­tion in China is bet­ter than in many other large coun­tries as there is no risk of a na­tional debt cri­sis. There­fore, such strong sta­bil­ity can pre­vent any sim­ple eco­nomic shocks from caus­ing se­ri­ous dam­age to China’s eco­nomic growth.

Fi­nally, the coun­try en­joys higher so­cial sta­bil­ity than many coun­tries, which means it has the abil­ity to pre­vent the risks from so­cial con­tra­dic­tions from in­ten­si­fy­ing or get­ting out of con­trol.

But de­spite th­ese ad­van­tages, Chi­nese pol­i­cy­mak­ers should not ig­nore the shocks that will come from the Fed’s move, and they must be pre­pared for them.

As emerg­ing economies ac­count for half of China’s trade nowa­days, and are also the ma­jor mar­kets for the coun­try’s for­eign di­rect in­vest­ment and most for­eign projects, the changes may have a strong bear­ing on China’s ex­ports, FDI, and over­seas engineering projects.

To be more spe­cific, there are three im­pacts to be aware of. First, do­mes­tic in­fla­tion will de­rive more from the ris­ing cost of la­bor and other costs in the do­mes­tic mar­ket in­stead of be­ing led by im­ported in­fla­tion as be­fore. Sec­ond, with cap­i­tal flows re­turn­ing back to ad­vanced economies, the liq­uid­ity from ex­ter­nal in­put will de­crease, so some bub­bles in the as­set mar­ket, such as the over­heat­ing real es­tate sec­tor, will likely suf­fer con­sid­er­ably in the near fu­ture. Fi­nally, the prices of some do­mes­tic raw ma­te­ri­als and re­sources will de­cline be­cause of the fall­ing prices of in­ter­na­tional pri­mary com­modi­ties. Most nat­u­ral re­sources in China, such as min­er­als, have lower qual­ity but higher min­ing costs com­pared to other sim­i­lar in­ter­na­tional prod­ucts. So if it is a bull mar­ket glob­ally, such re­sources can make some profit, while in a bear mar­ket, those do­mes­tic in­dus­tries and com­pa­nies will likely suf­fer from losses, such a sit­u­a­tion will be es­pe­cially se­vere in the north­west of China.

How­ever, the eco­nomic tran­si­tion also of­fers China an op­por­tu­nity, as it will en­able it to have a bet­ter han­dle over im­ports of pri­mary re­sources and thus strengthen China’s dom­i­nance over the in­ter­na­tional re­source mar­ket. China is al­ready the largest im­porter of pri­mary prod­ucts, and one of China’s core in­ter­ests is to main­tain a sta­ble sup­ply of for­eign re­sources. How­ever, since the turn of this cen­tury, many re­source-rich coun­tries or re­gions have launched a wave of “re­source pop­ulism”. Var­i­ous par­ties and groups try to share the ben­e­fits from the ex­plo­ration of re­sources with­out giv­ing enough thought to their sus­tain­able de­vel­op­ment. In the in­ter­na­tional mar­ket, the ris­ing num­ber of cases in which ex­port­ing coun­tries have vi­o­lated con­tracts has brought about losses to im­port­ing coun­tries. Now, with the on-go­ing de­cline in pri­mary com­mod­ity prices, China can take the op­por­tu­nity to solve the prob­lem and build a healthier trade en­vi­ron­ment.

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