Fi­nan­cial mar­ket tur­moil

The Pak Banker - - 4EDITORIAL -

ON the last day of the World Eco­nomic Fo­rum in Davos, a high­level panel of fi­nance of­fi­cials dis­cussed the con­tin­u­ing tur­bu­lence in the fi­nan­cial mar­kets and iden­ti­fied the risks fac­ing the global econ­omy. Over the past few months, a range of fi­nan­cial as­sets, in­clud­ing eq­ui­ties, com­modi­ties and cur­ren­cies of emerg­ing mar­kets, have fallen sharply. Ac­cord­ing to an es­ti­mate, nearly $15 tril­lion in value has been wiped off from the world's fi­nan­cial mar­kets since their peak. The melt­down on the world's fi­nan­cial mar­kets has gath­ered pace since the start of 2016. The S&P 500 has fallen 9pc, while the Mor­gan Stan­ley Cap­i­tal In­ter­na­tional's MSCI Emerg­ing Mar­kets in­dex has de­clined 11pc. The S&P Gold­man Sachs Com­mod­ity In­dex (S&P GSCI), a bench­mark in­dex for com­modi­ties, has gone down 13pc. Ac­cord­ing to the In­sti­tute of In­ter­na­tional Fi­nance, cap­i­tal out­flows of nearly $735 bil­lion took place from the world's emerg­ing mar­kets in 2015, with an es­ti­mated $676bn from China alone.

The slow­down in China is the pri­mary rea­son for the jit­ters hit­ting the world mar­kets. Ac­cord­ing to the lat­est data, in­dus­trial ac­tiv­ity, man­u­fac­tur­ing out­put and China's con­struc­tion and ex­port sec­tors have been fac­ing re­ces­sion. Over the past many years, China has been the main en­gine of global growth. In 2013, China ac­counted for 49pc of the ex­pan­sion in global GDP for the year, ver­sus a con­tri­bu­tion of 29pc by the US econ­omy for the year. In terms of im­ports, China ab­sorbed around $2tr of goods from the rest of the world in 2014. It is the big­gest ex­port mar­ket for 43 other coun­tries, rang­ing from Aus­tralia and South Korea to South Africa and Brazil. The slow­down of China's econ­omy and its chain ef­fect on global de­mand has been re­flected in the in­ter­na­tional com­mod­ity mar­kets. The 75pc col­lapse in the price of bench­mark Brent crude since July 2014 has as much to do with ex­cess pro­duc­tion as with fall­ing de­mand. China's of­fi­cial GDP growth for 2015 stood at 6.9pc, its slow­est eco­nomic ex­pan­sion in 25 years. From its re­cent peak of over 14pc growth in 2007, the 2015 growth rate rep­re­sents a halv­ing of China's an­nual eco­nomic ex­pan­sion.

The slug­gish­ness of China's econ­omy not­with­stand­ing, the pan­elists at Davos took a gen­er­ally op­ti­mistic view of the global econ­omy. Bank of Ja­pan Gov­er­nor Haruhiko Kuroda said that the slow­down is a nat­u­ral off­shoot of what the Chi­nese au­thor­i­ties are try­ing to do: trans­form the econ­omy from one based on in­vest­ment and man­u­fac­tur­ing into one more fo­cused on con­sump­tion and ser­vices. Ac­cord­ing to him, China will suc­ceed in its re­bal­anc­ing ef­forts. Chris­tine La­garde, the IMF's man­ag­ing di­rec­tor, ob­served that China's eco­nomic tran­si­tion is a "mas­sive un­der­tak­ing", but hoped that growth will im­prove this year to 3.4pc from 3.1pc in 2015. Euro­pean pol­i­cy­mak­ers also sounded a pos­i­tive note as wor­ries over Greece have eased a bit. A mod­est pick-up in EU eco­nomic growth has also bol­stered con­fi­dence that the sin­gle cur­rency zone will not break up.

The con­sen­sus of opin­ion among the lead­ers of the world econ­omy was that the slow­down in China is a nat­u­ral out­come for an econ­omy in tran­si­tion. It was noted at the Davos fo­rum that given its size, a growth rate of even 5-6pc a year for China will add sub­stan­tially to the global GDP. In other words, even a slower-grow­ing China will con­tinue to re­main an es­sen­tial part of the global econ­omy. The sheer size of China and the fi­nan­cial re­sources at its com­mand are likely to en­sure that its eco­nomic growth will sta­bilise at a fairly el­e­vated level in the short to medium term. But this will re­quire that Chine meet head on its deep struc­tural chal­lenges and take steps to get rid of its huge debt bur­den.

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