ANKARA—Global finance leaders meeting in Turkey this week are
seeking details from Chinese officials on how Beijing plans to calm
turbulent markets and prevent a collapse in the world's
second-largest economy.
China's market routs and a slew of weak data are fueling
concerns among the Group of 20 biggest economies that a stalled
Chinese economy could spur further global sell-offs and push world
growth deeper into a long-term rut.
China's turmoil, a souring global growth outlook and the
prospect of higher borrowing costs as the U.S. Federal Reserve
prepares to raise interest rates for the first time in nearly a
decade slammed emerging markets again Friday. The Russian ruble
sank by as much as 2.3% against the dollar, the South African rand
shed 0.5% and Turkey's lira slumped back toward all-time lows
against the greenback.
Friday's sell-off comes despite signals from the European
Central Bank on Thursday that it may embark on additional monetary
easing to stimulate the eurozone economy, which is grappling with
stagnant growth and inflation near zero. The persistent pressure on
markets led by developing nations highlights concerns about China's
ability to counter a slump in financial markets stoking economic
risks.
"Viable alternatives—not rhetoric—should be presented," South
Korean Finance Minister Choi Kyung-hwan said in an interview ahead
of a meeting of G-20 finance ministers and central bankers Friday
and Saturday.
The International Monetary Fund this week said it is planning to
downgrade its global growth outlook for the year—already at its
slowest rate since the financial crisis—in part because China's
slowdown was weighing on global output more than previously
expected.
That's why ECB chief Mario Draghi said China would dominate
talks among officials. "We do expect to have much more visibility
than we do today."
Beijing's handling of its market crises have fueled questions
about whether it has complete control over its economy, and if the
Communist government would put the brakes on a promised overhaul of
its economy. That uncertainty has fomented market turmoil as
investors fear growth could be far lower than the Beijing's
official 7% rate.
"There are questions being raised about Chinese policy-making
over the last several months," said Ted Truman, a senior fellow at
the Peterson Institute for International Affairs and former top
financial diplomat at the U.S. Treasury. "They look less like a
smooth-oiled machine and more like they are making it up as they go
along. That has unnerved some people."
Beijing has promised to shift its economy away from a
credit-fueled, export-driven investment strategy to one more
reliant on household consumption. A key plank in that effort is
allowing markets to play a much stronger role in the carefully
managed economy.
But U.S. and other G-20 officials are concerned that China's
recent market routs could undermine political support for that
economic transition, slowing the pace of overhauls, which could in
turn lower the country's long-term growth prospects.
"The question is, are they managing that transition in an
effective and orderly way," U.S. Treasury Secretary Jacob Lew told
CNBC Wednesday.
Besides China's slowdown, the IMF said a host of other downside
risks threaten to push the global economy into much deeper trouble
without concerted action by the largest economies.
"Risks are tilted to the downside, and a simultaneous
realization of some of these risks would imply a much weaker
outlook," the IMF said in a report on the state of the global
economy for the G-20. "Strong mutual policy action is needed to
raise growth and mitigate risks."
With growth slowing in many corners of the world and the U.S.
economy strengthening, investors have plowed back into the U.S.,
pushing the value of the dollar up against most major currencies.
That is a problem for many countries and corporations that have
borrowed heavily in dollars but whose income is denominated in
local currencies. Combined with the Fed's plan to raise rates in
the near future, those weakening growth prospects and heavy debt
loads are a toxic mix for many companies and economies, especially
in industrializing nations.
"At this stage global markets, China and emerging markets,
likely need a much more coordinated global—G-20—-response," said
Tim Ash, an economist at Nomura in London. "Not sure we are close
to that."
The fund's prescription for the global economy hasn't changed
much over the past several years, but politics have hindered G-20
efforts to bolster global growth. The IMF has urged both emerging
and developed nations to overhaul their economies to make them more
competitive. It has long cautioned developing nations to get their
fiscal houses in order. The IMF has backed more central bank
easing—including asking the Fed to delay its rate rise until
2016—to spur growth and avoid curbing global output. And the fund
has pushed for more infrastructure investment as a way to boost
global demand.
While central banks have eased, other policy makers have
struggled to push through deep, meaningful economic overhauls. Now
that borrowing costs are rising and growth in many of the world's
largest emerging markets slowing, prospects for many economies are
dimming even further.
If China's growth falls off a cliff, it would send shock waves
across the globe. The country's slowdown has already been a prime
factor in the fall in commodity prices and slumping growth in some
of the largest industrializing nations from China to Latin
America.
The World Bank estimates that a 1 percentage-point decline in
China's growth shaves a half percentage-point off global growth.
That means if forecasters such as Lombard Street Research, whose
projection for the year is more than 3 percentage points below
Beijing's official rate of 7%, are right, a Chinese nosedive would
ax 1.5 percentage points off global growth.
With the IMF estimating global growth of 3.5% this year, the
world economy can ill afford such a decline.
Kwanwoo Jun contributed to this article
Write to Ian Talley at ian.talley@wsj.com and Emre Peker at
emre.peker@wsj.com
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(END) Dow Jones Newswires
September 04, 2015 07:55 ET (11:55 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.