Daily Times

China’s real GDP growth peaked in 2007 at 14.2%, stabilizing in 2017 at 6.8%, giving rise to a myth that the slowing economy is affected by a decline in Chinese equities and the ongoing trade war with USA. Realistically speaking, the Chinese capital market has little meaningful links with its real economy, as capital is raised in the West through the bourses or capital markets whereas Chinese financing model relies upon obtaining loans from state run banks. Institutional trading in the USA accounts for almost 90% of equity trading. The depreciation of almost 8% in the Chinese currency in almost a year’s time till August nurtured a myth that the Yuan is plunging, although a basket of Western as well as the Japanese currency declined against the US Dollar. Interestingly, China’s trade with the US in 2015 was 5% of China’s GDP, slipping from 8% in 2010.

A persistent myth is the forthcoming thump of the Chinese economy, on account of a debt surge in the aftermath of the global financial crisis of 2008 when the Chinese economy was sustained as a result of a flood of bank funding. The downturn is that China’s debt to GDP ratio is exceedingly high compared to Western standards and when China is compelled to deleverage, an economic meltdown is certain to occur. The intriguing aspect is that the composition of Chinas’ debt comprises of domestic loan portfolio; a liability of state-owned enterprises to state-owned banks.

The saving grace, if this is the case, is shifting of unproductive debt to productive usage and the IMF’s estimates of China’s “incremental capital output ratio” postulating that lower value results in more productive investment in capital, statistically a decline from around 7 in 2016 to 5 in 2017. The situation has radically altered pre and post 2008, as earlier China’s economy was worse off when compared with Japan, however now the position is markedly different and any ripple of uncertainty may cause havoc. China is taking strides to edge past the US as almost 35% of world growth from 2017 to 2019 will come from China, compared to 18% from USA, with Europe trailing in at 8%. This does not factor in the US $ 900 billion “One Belt and One Road” global trade rewiring network infrastructure. Moves by US to whittle the effectiveness of WTO as a trade dispute regulatory authority through blocking appointments to the WTO’s appellate body may not be enough to ensure its dominance of world trade.

Turkey may be the proverbial precursor to a European or global financial crisis as its borrowings from Spanish banks are in excess of $82 billion, French banks owed $38 billion and Italian banks owed $17 billion. Turkey desperately needs $220 billion annually to meet its debt. In Latin America Argentina is again posed to seek a bailout from the IMF

Recapitulating the worldwide economic and financial crisis of 2008 began in 2007, in the wake of financial and real estate speculation in the United States on the heels of a long period of international financial instability, trade imbalances and regional crises. By late 2008 the crisis had engulfed many Western economies where the banking system was terribly exposed. Today, Turkey may be the proverbial precursor to a European or global financial crisis as its borrowings from Spanish banks are in excess of US $82 billion, French banks owed $38 billion and Italian banks owed $17 billion. Turkey desperately needs $220 billion annually to meet its debt. In Latin America Argentina is again posed to seek a bailout from the IMF.

The US moderating influence on other developed economies has waned despite bluffing. Cyberspace trade conflicts may turn out to China’s advantage and in the decade since 2008 digital assertion has diluted regulatory roles. The US has imposed tariffs against imports of Chinese goods of US $250 billion as part of its avowed objective to coerce China to introduce transparency and cease intellectual piracy and theft that is damaging US industry. Retaliatory tariffs could spill over to developing countries, including Pakistan as their foreign currency reserves may deplete as internal discontent rises.

The resources of multinational organizations like the International Monetary Fund, World Bank and OECD reassures that IMF and World Bank possess the seamless and meshed lending capacity of  $1 trillion and $263 billion to ward of any major crisis. Regional mechanisms including Asia’s Chiang Mai Initiative Multilateralisation agreement with a component of US $240 billion and European Stability Mechanism with a component of US $600 billion, exist as backup safety fiscal nets, at least theoretically. However, not all such funding are readily available and may be locked in existing programs, as in Greece. The European Stability resources are hands off for Asian economies lacking resilient capital markets.

China’s impressive economic march has been made possible by capacity building through research and acknowledgement of its academics internationally acclaimed standings. Pakistan in order to insulate itself from global financial slowdown must emulate China’s initiatives of capacity building in academics and research, as universities in China are ascending the upper spectrum of international academic ranking. There is no cartelization in research. A prime example is Peking University and Tsinghua University which are ranked in the top 30 elitist universities of the world, with three dozen universities gearing up to be rated similarly to be within the top 50 universities of the world.

The author is involved in research in the areas of finance and energy. Nadir Mumtaz has reviewed the article

Published in Daily Times, October 1, 2018.