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China crisis and the world

Last week, China’s stock market actually crashed twice. In that period, an estimated $1.1 trillion in wealth was lost.  The Chinese currency  also depreciated two percent in one week. It is reported that China had to spend around half a trillion dollars to stabilize its currency.

Although the Chinese stock markets and currency seem to have  stabilized, the prevailing opinion of  economists seem to be that China is headed towards either a recession or prolonged stagnant growth. Money is fleeing the country in huge amounts. Bloomberg reports that there was $461 billion of net capital outflow in the third quarter of last year. In the fourth quarter, there was a $367 billion outflow. The decline in money outflow from third to fourth quarter was attributed to the imposition of informal, off the book capital controls and not to an improvement in sentiment about China’s future.

China was able to protect itself from the effects of the 2008 global financial crisis when authorities developed a $585 billion stimulus package that it funnelled into infrastructure, high speed rail lines and intercity highways. After that, the response to any economic weakness in China was to spend billions  to stimulate the economy.

It seemed then that the so-called China economic model was the next new normal in international economics. But the model has hit several bumps and the flow of capital out of China is the best indicator. The Chinese are taking money out of their country which tells us that their perception is that China is headed for turbulent economic years in the next decade.

Can China crisis affect the world?

Opinion seems divided on whether the China economic crisis could lead to another global economic crisis. Nobel Prize Economics winner Paul Krugman and business guru George Soros seem to have different views. However, both of them do have serious concerns about possible negative effects on the world economy.

 Krugman recently wrote that the China crisis does not appear big enough to trigger a worldwide crisis but he worries about the psychological effects of another stock market crash that could lead to a transmission of panic to global markets.

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George Soros recently told a conference: “ China has a major adjustment problem. I would say it amounts to a crisis. When I look at the financial markets, there is a serious challenge which reminds me of the crisis we had in 2008.” Other economists believe that the next global downturn which could now be beginning in China could even be worse than the one that begun in 2008.

Perhaps, the most sober assessment has been the one recently reported by Bloomberg: “ The markets still do not understand China. The financial community has accepted too much of the Chinese government’s line on its economy, and traders have not discounted the severity of the downturn that will almost certainly take place there [China]. So just imagine what happens to global markets when distressing news out of China gets really dramatic.

If China were to fall apart at any other time, the contagion that Krugman worries about could be limited. At the moment, however, the world economy is vulnerable with growth a concern almost everywhere but Africa. Moreover, the post-war international system looks fragile with Russia redrawing borders in Europe by force, with China grabbing the waters of the South China Sea, with North Korea detonating nuclear weapons it is not supposed to have, and with another round of violence in the Middle East.”

While there are different opinions on the potential impact of its crisis, there seems to be a consensus that another global financial meltdown, triggered by China’s woes, is very possible.

Philippines and China

The Philippines has been relatively immune to the economic slowdown in China since it is not a big  investor nor a major trading partner.

China’s foreign policy has been focused on taking advantage of its geographical position and its economic capabilities. The most important element of this core strategy is its expected rise as the next economic superpower. Its growing dominance of international trade has made it more influential. China has also used its growing wealth to modernize its military and naval capabilities. It has built an aircraft carrier and built artificial islands in the West Philippine Sea. Several of these “islands” already have air bases which can be used by fighter jets.

In order to counter American and Japanese economic influence in Asia, China has proposed setting up an Asian Infrastructure Bank which will compete with the Asian Development Bank. The Trans Pacific Partnership ( TPP) is a free trade agreement led by the United States and Japan. China is organizing a similar organization – the  RCEP.

The question now, that will be of special interest to the Philippines, is the effect of the internal economic crisis in China on its foreign policy. Will China’s rulers become more aggressive and use nationalism as a battle cry to maintain its political dominance? Or will China be forced to retreat from its aggressive territorial demands and focus first on reviving its economy and introducing more economic and political reforms?  The one sure bet is that relations with China will be very high on the agenda of the next President.

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The Aquino Legacy: An Enduring Narrative by Elfren Sicangco Cruz and Neni  Sta. Romana Cruz is a collection of essays and stories on Ninoy, Cory and the Aquino family who have played such a pivotal and dramatic role in shaping Philippine history. As mentioned in President Aquino’s foreword, the book “serves as a reliable source of information for Filipinos belonging to the millennial generation who may not be aware of how dire conditions were at the time and how we have, since then, moved forward as a people. “The Aquino Legacy,” published by Imprint Publishing, is now available at Fully Booked stores.

Email: elfrencruz@gmail.com

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