Friday, January 23, 2009

Financial Crisis Raises International Risks

Dongtian Mountain Hall, by Dong Yuan (c. 934-c. 962), a painter in the Southern Tang Kingdom of the Five Dynastics and Ten Kingdoms period. National Palace Museum, Taipei.

The downturn spawned by the US financial crisis is causing severe economic problems and the threat of social unrest in developing nations around the world.

China's Slowing Economy

We know that China's export sector is being hit hard, and according to the Bloomberg story Roubini, Edwards Predict Slump in S&P 500 on China, the downturn is severe. Economics guru Nouriel Roubini said that China is in recession despite government data showing 6.8 pct 4th-quarter growth rate. Societe Generale's global strategest Albert Edwards, investment strategist of Societe Generale, said rising unemployment among factory workers will fuel social unrest, threatening the Communist Party’s survival and increasing the risk authorities will devalue the yuan to boost exports.

Slower Growth to Continue

The Financial Times reports in China data to show slowest growth in decade that economists are lowering their estimates of 2009 Chinese economic growth. After adoption of an aggressive policy of fiscal stimulus and deep cuts in interest rates, "recent figures for credit and money supply growth have encouraged hopes among some economists that the stimulus efforts are beginning to gain traction". Not all economists are impressed. RBS and Morgan Stanley lowered estimates of 2009 growth to "below 6 percent". This compares to 13% in 2007 and would be the lowest GDP growth rate in 20 years.

US Deleveraging Hits Trade Partners Hard

There are good reasons to forecast a continued slowdown in China, as Paul Kedrosky argued in Watch out, world: Americans are saving again. He noted that the US savings rate rose to 2.8% in November from zero at the start of 2008, and further opined that the savings rate could rise to 4% at the end of 2009 and 7% by late 2010. Even if the savings rate held at 3%, the capital flows to US banks would be five times the total of China's current Treasury holdings. As Kedrosky says, "all that money has to come from somewhere", meaning from China and other US trading partners. His prediction: "It will be biggest story of 2009: How will rest of world restructure in face of US hell-bent on replenishing its bank accounts?"

China Already Faces Political Problems

Even without the pressures of the global financial crisis, China already has problems with social and political stability. The New York Times reported recently in China Sees Separatist Threats that China's cabinet, the State Council, issued a white paper saying that it sees threats from independence movements related to Taiwan, Tibet and the western desert region of Xinjiang.

Tension in US-China Relations

The US will have to steer a careful course with respect to trade, as shown by China's sharp response to recent comments by the new US Treasury Secretary, Timothy Geithner. Mr. Geithner wrote to a senate finance committee that "President Obama, backed by the conclusions of a broad range of economists, believes that China is manipulating its currency" and "President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China's currency practises." The chief economist at China Construction Bank, Hua Ercheng, responsed "I was very disappointed and surprised at the remarks. We are concerned about rising trade protectionism in the US."

Risk of Competitive Devaluations

There is always the risk that countries will try to protect domestic jobs by devaluing their currencies to make exports more competitive. In Alliance Bernstein's Asian Weeekly Insights, Anthony Chan reports Fear of Jobs Crisis Keeps Beijing Under Pressure to Depreciate RMB . Chan believes that the depreciation of the Renminbi against the dollar by about half a percent in the last two months signals a Chinese policy to move toward a weak currency, and that this policy is motivated by the need to create jobs:

With export growth falling off a cliff and the closure of small- and medium-sized factories becoming rampant along the export-dependent coastal regions, a strong exchange rate makes no sense from a political-economy perspective. China needs to create 10–15 million urban jobs each year to absorb the millions of rural workers migrating to the cities. Failure to do this would jeopardize social and political stability, and pose a serious challenge to the Communist Party’s one-party rule.

Widespread Unrest Predicted around the World

The Times warned recently that riots in Iceland, Latvia and Bulgaria are a sign of things to come. Speaking to a protest meeting in a Reykjavik cinema, Robert Wade of the London School of Economics warned that world was approaching new tipping point. He predicted large-scale social unrest starting in the period March-May 2009.

It will be caused by the rise of general awareness throughout Europe, America and Asia that hundreds of millions of people in rich and poor countries are experiencing rapidly falling consumption standards; that the crisis is getting worse not better; and that it has escaped the control of public authorities, national and international.

The article warns that Ukraine could be next because of its gas pricing deal with Moscow. Bulgaria has seen its worst riots since the fall of the Socialist government in 1997. Since the time of Wade's address, Iceland's government has fallen.

Capitalism Freezes in Worldwide Winter of Discontent

This was the headline of a Bloomberg article saying that, around the world, social strains are threatening the established political order, putting some countries’ very survival at risk. In past month, Nigerian rebels threatened renewed warfare against foreign oil producers, Russia sent riot police from Moscow to quell anti-tax protest in Siberia and China’s communist leadership warned of social agitation as 20th anniversary of Tiananmen Square massacre looms.

The article quoted Louis Michel, the European Union's development aid commissioner as saying that disillusionment and spillover effects of the global recession “are not only likely to spark existing conflicts in the world and fuel terrorism, but also jeopardize global security in general.” The effects threaten countries around the world, including: instability in Pakistan, a more aggressive if economically stricken Iran, a collapsing Somalia, civil disorder in copper-dependent Zambia, a strengthened, drug-financed insurgency in Colombia, a more warlike North Korea, and “blood and tears” in Pakistan.