\u2018The world has yet to achieve full economic recovery. Global growth continues to be weighed down by high debt, high unemployment and lacklustre investment\u2026<\/em><\/p>\n \u2018The recovery remains fragile because of significant risks. One such risk emanates from the expected tightening\u2026of US monetary policy at a time when many other countries are easing\u2026<\/em><\/p>\n \u2018The divergence of monetary policy paths has already led to a significant strengthening of the US dollar. Emerging markets could be vulnerable, because many of their banks and companies have sharply increased their borrowing in dollars\u2026<\/em><\/p>\n \u2018The potential spillovers would affect China mostly through its trade relationships with other emerging markets\u2026Chinese exports would certainly be affected.\u2019<\/em>.<\/p><\/blockquote>\n The problem is that Madame Lagarde has only addressed half the problem for China<\/strong><\/a> \u2014 the impact on trade. She has glossed over the more dangerous half of the problem \u2014 the impact on China\u2019s debt.<\/p>\n The analysis is straightforward. The Federal Reserve has been flirting with tightening policy since Ben Bernanke\u2019s May 2013 speech in which he introduced the idea of reducing, or \u2018tapering\u2019, Fed bond purchases.<\/p>\n This led to the infamous taper tantrum of May\u2013July 2013 in which leveraged investors involved with the dollar carry trade dumped stocks and currencies in emerging markets and repaid dollar-denominated debt.<\/p>\n Through late 2013 and all of 2014, the Fed did follow through with its tapering plans, but borrowers in emerging markets did not reduce their dollar debts. The problem now was not US-based leveraged traders, but the emerging-market borrowers themselves. They borrowed US dollars even though their central banks had no ability to print dollars \u2014 only the Fed can do that.<\/p>\n The result was what I call the \u2018New Big Short\u2019. Emerging-market borrowers are \u2018short\u2019 over US$9 trillion\u2026with no ability to print.<\/p>\n That\u2019s half right. Distress in emerging markets<\/a> will hit Chinese exports. But Lagarde ignored the fact that China is itself an emerging market and has one of the most highly leveraged economies in the world, including the largest amount of dollar-denominated debt of any emerging-market borrower.<\/p>\n Here\u2019s a chart showing the recent increase in private leverage in China:<\/p>\n When you add government leverage to private leverage, the picture is even more dangerous:<\/p>\n As the Fed prepares to raise rates, a dual crisis confronts China. Its export markets will dry up, exactly as Lagarde suggests, but it will also face a debt crisis.\u00a0Blind to the risks<\/b><\/a><\/p>\n <\/p>\n On 22 March 2015, Christine Lagarde \u2014 the managing director of the International Monetary Fund (IMF) \u2014 made an important speech in Beijing. Madame Lagarde outlined the dangers of US Federal Reserve tightening for emerging markets. Her warning was stark: … Continue reading ![\"\"](\"http:\/\/2sdyuft3m8u44r50x3q3y1b1.wpengine.netdna-cdn.com\/wp-content\/uploads\/2015\/06\/MM20150609b.jpg\")
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