{"id":32456,"date":"2016-01-19T18:35:53","date_gmt":"2016-01-19T17:35:53","guid":{"rendered":"http:\/\/www.w-t-w.org\/en\/?p=32456"},"modified":"2016-01-20T20:44:14","modified_gmt":"2016-01-20T19:44:14","slug":"32456","status":"publish","type":"post","link":"https:\/\/www.w-t-w.org\/en\/32456\/","title":{"rendered":"China’s Impact on the World Economy"},"content":{"rendered":"

Mohamed a el Erian writes: \u00a0The recent decline in China\u2019s currency, the renminbi, which has fueled turmoil in Chinese stock markets and drove the government to suspend trading twice last week, highlights a major challenge facing the country: how to balance its domestic and international economic obligations. The approach the authorities take will have a major impact on the wellbeing of the global economy.<\/p>\n

The 2008 global financial crisis, coupled with the disappointing recovery in the advanced economies that followed, injected a new urgency into China\u2019s efforts to shift its growth model from one based on investment and external demand to one underpinned by domestic consumption. Navigating such a structural transition without causing a sharp decline in economic growth would be difficult for any country. The challenge is even greater for a country as large and complex as China, especially given today\u2019s environment of sluggish global growth.<\/p>\n

For years, China\u2019s government sought to broaden equity ownership, thereby providing more Chinese citizens with a stake in a successful transition to a market economy. But, like the United States\u2019 effort to expand home ownership in the years preceding the 2008 crisis, Chinese policies went too far, creating a financially unsustainable situation that implied the possibility of major price declines and dislocations.<\/p>\n

As a result, the adjustment challenge has grown dramatically. With Chinese companies no longer able to sell a rapidly increasing volume of products abroad and support further expansion of productive capacity, the economy has lost some important growth, employment, and wage engines. The resulting economic slowdown has undermined the government\u2019s capacity to maintain inflated asset prices and avoid pockets of credit distress.<\/p>\n

In an effort to limit the detrimental impact of all this on citizens\u2019 wellbeing, Chinese officials have been guiding the currency lower. A surprise devaluation<\/a> last August has been followed by a number of lower daily fixes in the onshore exchange rate, all intended to make Chinese goods more attractive abroad, while accelerating import substitution at home. The renminbi has depreciated even more in the offshore market.<\/p>\n

China\u2019s currency devaluations are consistent with a broader trend among both emerging and advanced economies in recent years. Soon after the global financial crisis, the US relied heavily on expansionary monetary policy, characterized by near-zero interest rates and large-scale asset purchases, which weakened the dollar, thereby boosting exports. More recently, the European Central Bank has adopted a similar approach, guiding the euro downward in an effort to boost domestic activity.<\/p>\n

But in pursuing its domestic objectives, China risks inadvertently amplifying global financial instability. Specifically, markets worry that renminbi devaluation could \u201csteal\u201d growth from other countries, including those that have far more foreign debt and far less robust financial cushions than China, which maintains ample international reserves.<\/p>\n

This concern speaks to the even more challenging balancing act that China must perform as it seeks to play the role in global economic governance that its economic weight warrants. After all, China is now the world\u2019s second-largest economy (and, by some non-market measures, the largest).<\/p>\n

And, indeed, China has lately been showing greater interest in gradually internationalizing its financial system. Notably, it recently succeeded in persuading the International Monetary Fund to add the renminbi to the basket of currencies that determines the value of the Special Drawing Right, the unit the IMF uses in dealing with its 188 member countries.<\/p>\n

That step \u2013 which places the renminbi on par with the major global currencies (the US dollar, the euro, the British pound, and the Japanese yen) \u2013 will enhance public- and private-sector acceptance of China\u2019s currency in the international monetary system. At the same time, it created the expectation \u2013 though not the obligation \u2013 that China will refrain from aggravating global financial instability.<\/p>\n

There will come a time when China\u2019s domestic and international responsibilities will again be relatively well aligned. But that time is not now; and, given the country\u2019s tricky ongoing structural transition, it probably will not come anytime soon.<\/p>\n

\"China's<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Mohamed a el Erian writes: \u00a0The recent decline in China\u2019s currency, the renminbi, which has fueled turmoil in Chinese stock markets and drove the government to suspend trading twice last week, highlights a major challenge facing the country: how to … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"footnotes":""},"categories":[13],"tags":[],"class_list":["post-32456","post","type-post","status-publish","format-standard","hentry","category-finance"],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t