External Expansion Limited

Friday, 28 March 2014


From the point of view of international trade we are currently at various events that cause some uncertainty in the markets, such as the case of Ukraine, Russia, Venezuela and China. We are talking about countries that are part of the so-called emerging countries and we are in a context where advanced economies fail to definitively overcome the crisis, so we usually hear omens that something new can occur, making us ask, how this would affect the main actors of foreign trade, defined as the EU and the U.S., while on the opposite side, how this would affect emerging understood as such to China, Russia, Latin America as a whole and major Asian economies excluding China.

To put the issue we will describe the events that have led to the emerging countries are still observed today carefully. These countries stumbled from one crisis to another during the 1980s to 1990s, but their luck began to change in the early years of the new millennium, because investing in emerging markets was more profitable. A dollar invested in emerging market equities at the start of 2003 generated about $4.78 by the end of 2010, a return of 21.5% a year, while investing a dollar in world equities generated $2.02, a 9% annually over the same period.
There was a combination of factors that led an extraordinarily positive development that produced growth rates that were well ahead of their historical experience, may mention each debt-fuelled consumption in advanced economies and the accompanying increase in the demand for emerging market exports; China's integration into the global economy and the associated commodity super cycle; the extensive availability of cheap external financing, and the widespread adoption of macroeconomic stabilization policies. Thus, emerging economies grew at a 7.5% average annual rate in the post 90s and before the global financial crisis period, and is believed to have been what led to this crisis in part because dependent on the growing demand from advanced economies, especially the U.S., in simple terms because China invested heavily in the infrastructure required to support its export sector and benefitted handsomely from West´s debt-fueled consumption. Meanwhile other emerging markets economies focused on the commodities and semi-finished good required to feed China´s vibrant export machine.
Since the 2009 financial crisis, China to offset their possible effects, the government encouraged a huge credit boom fostered largely used to finance real state construction and infrastructure, allowing them to grow 45% from the end of 2008 to 2013. A curious fact is that the bulk of this increase in credit was non-bank financing, meaning credit that flowed through a financial institutions other than regulated banks. Financial instruments have been developed that have overshadowed traditional bank deposits, in the case of bonds with insufficient oversight and some of these borrowers are already beginning to failing to repay and so now savers will be returning to banks.
Today, the U.S. economy still struggling to regain full employment, the European economy becalmed in the aftermath of a serious sovereign debt crisis and many emerging markets looking increasingly vulnerable, so the global macroeconomic attention has become increasingly focused on China. It is stress upon that if growth is slow down and if this development carry serious financial faillout and even some sort of crisis. Therefore, to study in China in both the idea comes from some commentators that China could be facing a Lehman moment, or even a Greece or Spain moment, with some particularly Chinese characteristics, sounding downright scary.
Currently, few economists who say that is far from a difficult situation, because even if the government does not guarantee a non-banking institutions, will do so with the big banks, and China luckily has substantial scope for absorbing losses as banks are greater returns than American and European banks to the moments of the last crisis, making them more resilient and in case of a more serious problem could share issuance could raise further capital if needed. In addition, China has a very high savings rate, assuring banks a deposit base to continue to provide, and the work grows as investment in equipment and capital. In conclusion in this regard, fears that the world may be facing another "Lehman Crisis" emanating from China seem very far-fetched.
Now, if a crisis of Lehman happen in China and this was avoided, certainly affect the rate of GDP growth estimated at 7.5% target of the Chinese government. So what would happen in Europe and America to a decline in growth of Chinese GDP? Not much, since China is still only a small fraction of the world economy because although it relates to the rest of the world through trade their merchandise imports accounted for nearly 10 % of the world´s imports. The rest of the world exports to China were $1.95 trillion and even if Chinese imports fell by 15% in a very bad recession (fell 11% in the global financial crisis from 2008-2009), the direct impact on everyone else in the world would be a loss of approximately $300 billion of demand, or less than 0.5% of world GDP excluding China.
This could be painful in Europe and the U.S. if not totally out of their recessions, but the positive trend of growth should not be a serious problem, indeed, could benefit from this, since the effect of a deep recession China feel to the drastic reduction of the demand for raw materials used in the construction and infrastructure investment, meaning that the base metals and energy would become cheaper, which in turn are the main imports from Europe and the U.S. and their prices fall accelerating their recovery .
Ion net, the total effect of a China slowdown could be small for growth in the United States and Europe, but it certainly would be more negative for raw materials exporters and countries that produce manufactured goods imported by China (Latinoamerica, Russia and other Asian countries).
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Until the next article...

Leonardo Dufau

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