Much like a perfect storm at sea is the consequence of three converging bad weather fronts, three significant global economic trends have begun to intensify and converge in recent months: (1) a slowing of the China economy and a parallel growing financial instability in its shadow banking system; (2) a collapse in emerging markets currencies (India, Brazil, Turkey, South Africa, Indonesia, etc.) and their economic slowdown; (3) a continued drift toward deflation in the Eurozone economies, led by growing problems in Italy and economic stagnation now spreading to France, the Eurozone’s second largest economy. The problems in these three critical areas of the global economy, moreover, have begun to feed off of each other.
Despite tens of trillions of dollars injected into the global economy since 2008 by central banks in the US, UK, Europe, and, most recently Japan, real job creating investment is slowing everywhere globally. The massive liquidity (money) injections by central banks have either flowed into global financial markets speculation (stocks, bonds, derivatives, futures, options, foreign exchange, funds and financial instruments of various kinds), hoarded as cash on bank and non-bank corporate balance sheets, hidden away in dozens of offshore tax shelters from Cayman islands to the Seychelles, or invested in emerging markets like China, India, Brazil, Indonesia, Turkey, and elsewhere.
The primary beneficiaries of these central bank money creation policies have been global very high net worth investors, their financial institutions, and global corporations in general. According to a study in 2013 by Capgemini, a global business consultancy, Very High Net Worth Investors increased their investable wealth by $4 trillion in 2012 alone, with projected further asset growth of $4 trillion a year in the coming decade. The primary financial institutions which invest on their behalf, what are called ‘shadow banks’ (i.e. hedge funds, private equity firms, asset management companies, and dozens of other globally unregulated financial institutions) more than doubled their total assets from 2008 to 2013, and now hold more than $71 trillion in investible assets globally.
This massive accrual of wealth by global finance capitalists and their institutions occurred in speculating and investing in offshore financial and emerging market opportunities—made possible in the final analysis by the trillions of dollars, pounds, Euros, and Yen provided at little or no cost by central banks’ policies since 2008. That is, until 2014.
That massive tens of trillions of dollars, diverted from the US, Europe and Japan to the so-called ‘Emerging Markets’ and China is now beginning to flow back from the emerging markets to the ‘west’.
Consequently in turn, the locus of the global crisis that first erupted in 2008 in the U.S., then shifted to Europe between 2010-early 2013, is now shifting again, a third time. Financial and economic instability is now emerging and deepening in offshore markets and economies—and growing increasingly likely in China as well.
(The following analysis of China today is an excerpt from the author’s forthcoming article “The Emerging Global Economic Perfect Storm”, that will appear in the March print issue of ‘Z’ Magazine, where the Eurozone and Emerging Markets’ economies are assessed as well. For the complete article, see Z Magazine or the author’s website, www.kyklosproductions.com/articles/html.)
China’s Growing Financial and Economic Instability
Prior to the 2008 global financial crisis and recession, China’s economy was growing at an annual rate of 14 percent. Today that rate is 7.5 percent, with the strong possibility of a still much slower rate of growth in 2014.
China initially slowed economically in 2008 but quickly recovered and grew more rapidly by 2009—unlike the U.S. and Europe. A massive fiscal stimulus of about 15 percent of its GDP, or 3 times the size of the comparable U.S. stimulus of 2009, was responsible for China’s quick recovery. That fiscal stimulus focused on government-direct investment in infrastructure, unlike the U.S. 2009 stimulus that largely focused on subsidies to states and tax cuts for business and investors. In 2007-08 China also had no shadow banking problem to speak of. So the expansionary monetary policies it introduced, along with its stimulus, further aided its rapid recovery by 2010. Since 2012, however, China has been encountering a growing problem with global shadow banks that have been destabilizing its housing and local government debt markets. At the same time, beginning in 2012, the China non-financial economy, including its manufacturing and export sectors, has been showing distinct signs of slowing as well.
Dina sisi finansial, total hutang (pamaréntah jeung swasta) di Cina geus risen ti 130 persén GDP di 2008 ka 230 persén GDP, jeung bank kalangkang babagi rising ti 25 persén di 2008 ka 90 persén total ku 2013. Jadi kalangkang. pangsa bank tina total hutang geus ampir quadrupled sarta ngagambarkeun ampir sakabéh hutang salaku pangsa kanaékan GDP saprak 2008. bank kalangkang geus sahingga geus gaya nyetir balik tumuwuh masalah hutang lokal Cina sarta munculna fragility finansial.
Seueur tina kanaékan hutang éta diarahkeun kana gelembung perumahan lokal sareng gelembung hutang pamaréntah lokal anu dibarengan, sabab pamaréntahan lokal ngadorong perumahan, pinjaman perusahaan énggal, sareng proyék infrastruktur lokal dugi ka watesna. Hutang pamaréntah lokal diperkirakeun dina 2011 ku pamaréntah pusat Cina $ 1.7 triliun. Éta parantos ningkat dina ngan 2 taun janten langkung ti $ 5 triliun ku sababaraha perkiraan. Seueur hutang éta ogé jangka pondok. Ku kituna kacida teu stabilna, tunduk kana ingkar unpredictable, sarta bisa nyebarkeun jeung destabilize bagean lega tina sistem finansial di Cina - teuing kawas mortgages subprime di AS saméméhna.
A run-up in private sector debt is now approaching critical proportions in China. A major global instability event could easily erupt there, in the event of a default of a bank or a financial product. In some ways, China’s situation today increasingly appears like the U.S. housing and U.S. state and local government debt markets circa 2006. China may, in other words, be approaching its own Lehman Moment. That, in fact, almost occurred a few months ago with financial trusts in China. Fearing a potential default by the China Credit Trust, and its spread, investors were bailed out at the last moment by China central government. According to the Wall St. Journal, the event “exposes the weakness of the shadow banking system that has sprung up since 2009.
Tumuwuh instability finansial di Cina di pasar lokal na sahingga masalah poténsi utama pikeun Cina, sarta pikeun ékonomi global ogé, sakumaha duanana Cina jeung ékonomi dunya mimiti ngalambatkeun dina 2014.
Early in 2013, China policymakers recognized the growing problem of shadow banks and bubbles in its local housing and investment markets. Speculators had driven housing prices up by more than 20 percent in its major cities by 2013, from a more or less stable 3-5 percent annual housing market inflation rate in 2010. China leaders therefore attempted to rein in the shadow banks in May-June 2013 by reducing credit throughout the economy. But that provoked a serious slowdown of the rest of the economy in the spring of 2013. Politicians then returned on the money spigot quickly again by summer 2013 and added another mini-fiscal stimulus package to boost the faltering economy. That stimulus targeted government spending on transport infrastructure, on reducing costs of exports for businesses, and reducing taxes for smaller businesses. The economy recovered in the second half of 2013.
By early 2014, the housing bubble has again appeared to gather steam, while the real economy shows signs once again of slowing as well. In early 2014 it appears once again that China policymakers intend to go after its shadow bank-housing bubble this spring 2014. That will most likely mean another policy-initiated slowing of the China economy, as occurred in the spring of 2013 a year earlier. But that’s not all. Overlaid on the financial instability, and the economic slowdown that confronting that instability will provoke, are a number of other factors contributing to still further slowing of the China economy in 2014.
Salian ti stimulus fiskal ékonomi anyar sareng pasar perumahan anu panas teuing, sumber utama pertumbuhan ékonomi Cina nyaéta séktor manufaktur, sareng ékspor manufaktur khususna. Sareng éta ogé ngalambatkeun. Alesan pikeun ngalambatkeun dina manufaktur sareng ékspor aya dina kamekaran internal dina ékonomi Cina ogé masalah-masalah anu tumbuh di Euro sareng ékonomi pasar berkembang.
Cina ngalaman naékna gajih sareng nilai tukeur anu parah pikeun mata uangna, Yuan. Duanana naékkeun biaya produksina sareng ngajantenkeun éksporna kirang kompetitif. Naékna biaya produksi bahkan nyababkeun eksodus perusahaan multinasional global ti China, nuju ka ékonomi anu langkung mirah sapertos Vietnam, Thailand, sareng di tempat sanés.
Mayoritas ékspor Cina indit ka Éropa jeung ka pasar munculna, teu ngan ka AS Jeung salaku economies pasar munculna slow, paménta maranéhanana pikeun Cina dijieun barang jeung ékspor declines. Sabalikna, sakumaha Cina sorangan slows ékonomi, éta ngurangan impor na komoditi, barang semi-rengse, jeung bahan baku ti dunya munculna pasar (ogé ti pasar konci kawas Australia jeung Korea).
Balukar patali dagang sarupa aya antara Cina jeung Eurozone. Sabenerna, Cina mangrupikeun sumber ékspor panggedéna di Jerman, langkung ageung tibatan ékspor Jérman ka Éropa sanés. Janten upami Cina ngalambatkeun, éta peryogi langkung seueur ékspor ti Éropa, anu bakal ngalambatkeun ékonomi Eurozone anu parantos stagnan langkung jauh. Nya kitu, sakumaha Éropa stagnates, éta hartina kurang paménta pikeun barang Cina - sahingga salajengna slowing manufaktur Cina urang. Dina basa sejen, slowdown internal Cina urang bakal exacerbate stagnasi na deflation di Éropa, kitu ogé nyumbang ka slowing ékonomi malah gancang ayeuna dijalankeun di dunya munculna pasar.
Slowing will result as well from government policies designed to structurally shift the economy to a more consumption driven focus. That shift to consumption will begin in earnest following the Community Party’s March 2014 meeting. But consumption in China represents only 35% percent of the economy (unlike 70 percent in the U.S.), while Cina government investment is well over 40 percent of GDP. And it is not likely that consumption can grow faster enough to offset the reduction in investment, at least not initially.
So a long list of imminent major developments and trends in China point to a slowing of growth in that key global economy of almost $10 trillion a year. What happens in China, the second largest economy in the world, has and will continue to have a major negative impact on an already slowing Emerging Markets and a chronically stagnant Zona euro.
How the U.S. economy responds to the emerging global perfect storm will prove interesting, to say the least. But with evidence of US slowing in housing, manufacturing, job creation, auto and other retail sales, and with real family median income in decline and the real likelihood of further spikes in food and gasoline prices in the months immediately ahead, the ‘perfect storm’ emerging offshore does not portend well for the still fragile US economy now in its fifth year of below average, ‘stop-go’ economic recovery.