The G-20 Financial Ministers and Central Bank Governors Meeting has perhaps become the most important event for the world economy. A great deal was discussed at the meeting from Feb. 26 to 27 in Shanghai.
But the center of attention was the situation in the Asian-Pacific region, especially in China. On the first day of the forum, the world price of oil shot up to an unheard of high; one barrel of black gold sold for more than $36.50.
The price upswing is a record for the last month. But the Chinese stock market sunk by 6-7 percent on Feb 26, and there are significant, worrying reasons for this.
Chinese leadership does not plan to change anything. The government’s position is that there will be no devaluation of the yuan, and this is during an unprecedented collapse of exports. What’s more, even imports have shrunk by 20 percent this year. Capital is still frantically fleeing the country.
On the day before the meeting, Chinese officials hinted that they would like to work out an outline with their international partners involving a mild weakening of their exchange rate and that the People’s Republic of China’s reserves would continue to get sold off. But because this downward trend is unlikely to change, another question arises: What will happen to the PRC’s neighbors?
Asian markets became the epicenter of the 1997 crisis. It was here in the Asian-Pacific region that the new threat to the global economy came to a head. All of the EU, South America and Africa’s economic difficulties, symptoms of “slowing growth” in the U.S., became secondary to what was happening in China, and especially the area around it.
The consulting firm McKinsey values the cumulative debt of the PRC at $28 trillion. The country’s stock market already collapsed in 2015. The outflow of capital has reached trillions of dollars per year. The housing bubble has reached colossal proportions.
Neighboring China is problem-ridden Japan, where the economic situation has been worsening for a long time. But there’s also Southeast Asia, the purview of the southern PRC. There’s also Australia and New Zealand to consider.
In 2015 the U.S. included the majority of the countries in this region in its Trans-Pacific Trade and Partnership Agreement. According to tradition, each nation was promised economic growth, an influx of foreign capital and, as a throw-in, social and technological progress. China was not included in this pact, and Obama spoke of this with pride, as if it were a victory.
If the situation with China and Japan is straightforward, then the position and views of their southern neighbors will absolutely become clear as well. Perhaps these countries will confidently grow on the heels of the U.S.? Perhaps their successful economies will become a problematic counterbalance for Japan and China? Haven’t Western investors been moving capital from the PRC to these countries for several years?
Incidentally, it was at the pressure of their Western partners that China unambiguously assured the meeting’s attendees that they were not planning to shake the world economy with a sudden and substantial devaluation of its currency.
Alas, all this will not save China’s neighbors. Nor will the G-20 resolution, on supporting exchange and financial balance in the world, help. In Australia, the dollar is weakening, and the central bank, afraid to admit the possibility that an era of economic growth is ending, is referring to this time as a “transitional period.” Private and government export revenues from raw materials have dropped dismally.
China’s exports will continue to drop, about that there can be no doubt. The situation in New Zealand is similar. In both countries there are signs of weakening consumer demand.
The chance of a rise in unemployment is great. The New Zealand dollar is weak. But the situation in all these countries looks much better than that of their northern neighbors.
Indonesia was hit with a decrease in its economic growth rate back in 2014. The volume of investment has also diminished. According to data from the country’s Central Statistical Agency, GDP rose by 5.02 percent, but already in 2013 growth was 5.58 percent. GDP rose in total by only 4.79 percent in 2015, the worst outcome of the past six years.
Other countries in the region have followed the same trend: the Philippines, Malaysia, Thailand, Vietnam and Taiwan. Taiwan’s predicament is especially bad. In the fourth quarter of 2015, GDP fell by 0.28 percent in annual terms. The drop in the third quarter came to 0.63 percent. The total loss for the year was 0.85 percent.
Singapore’s economy only grew 2 percent in 2015. Since 2014 the Singapore dollar has been weakening against U.S. currency, which is connected with the outpouring of capital from the island government. A similar outflow is observable in Hong Kong.
But Chinese money is circulating throughout that financial center. Through Singapore capital is flowing back to the U.S. and other old industrial countries. This continual movement indicates the perspectives on the region. They are not optimistic.
Southeast Asia, Australia and Oceania are being squeezed between two enormous economies, each of which has its own problems. These economies, those of the United States and China, are closely intertwined, and are therefore in fierce competition. This competition puts the U.S. in a strange position. On the one hand, they can benefit from the devaluation of the yuan, which would deprive the PRC the opportunity to take hold as a globally centered country.
But on the other hand, devaluation, which Beijing is resisting, would hurt Chinese imports and bolster exports. That kind of market strangulation in the “Celestial Empire” would be the most undesirable outcome for the U.S. economy, which is growing less and less confidently and slipping increasingly often.
China can’t devalue the yuan, because demand is slipping more and more in its neighboring countries. The U.S. has included them in its Trans-Pacific Partnership, which promised them export demand and investment. All in all, if we are to believe official data, these economies are slowing or entering recession. Otherwise the global drop in prices for raw materials from 2014 to 2015 wouldn’t be possible, and it’s doubtful that the supply of oil would have reached this level of excess.
It’s likely that these areas of global development were discussed at the Beijing meeting. It’s just that a collective course of action against the crisis is not obvious. Simply holding back depreciation of the exchange rate is already not enough.
The eve of the G-20 Financial Ministers and Central Bank Governors in Shanghai Meeting was full of market optimism. These flashes of optimism may continue after. But the outlook on Asian markets will not change.
It’s already unimportant whether or not these countries will warn each other about devaluations, as was agreed at the Shanghai meeting. Fending off depreciations will not be easy, because they can happen spontaneously. But their cause will always be the same: weakening markets and outflow of capital.