THE TAIL OF THE DRAGON: THE NIGHTMARE RISING IN THE EAST

THE TAIL OF THE DRAGON: THE NIGHTMARE RISING IN THE EAST

Being the world's second-largest economy, China's slowing growth is steadily becoming a problem in the country, there are increasing concerns over the spread like a virus that affect the global economy. While the devaluation and the successive weak economic data of the said country are scaring the investors, the causes and the results of the more visible depression nightmare are given below.

The current phase is the third phase of the global economic crisis of 2008. After the bankruptcy of Lehman Brothers in 2008, the first phase of the crisis began. In this process, the United States has intervened rapidly to the crisis and through support packages, she has first recovered, then socialized the debt of the financial sector. However, because of the integrated nature of the global financial system, the crisis was not limited to the United States. The second stage of the crisis was experienced by the spread to Europe. The bankruptcy stage passed from the companies to the states. While Europe still did not emerge from the crisis, we have passed to the third stage: the deepening of the crisis. And this third stage was completed by the spreading across the world. In the production bases such as China, slowdown has become more pronounced.

In the coming period, the US Federal Reserve (Fed) and other major central banks may deepen the crisis they had postponed further with the expansion of credit, imposed since 2008. Grounding of the global economy, which had been kept afloat by credit expansion, may arise. Particularly the Fed, the major central banks do not have the primary weapon they can use this time to avoid the incoming wave. Productive investment will be destroyed. This recession could mean further spreading. The process will not be limited to one region, like the 1994 Asian crisis. Asian markets after the 1994 crisis were included in the global financial architecture. Therefore, a problem arising in one part of the system can quickly spread to the other parts.

Fear of a global slowdown triggered by China, which already causes a drop in commodity prices, has pulled the world financial markets to the bottom. From Asia to Europe, from the US to the emerging countries, the stock markets across the world witnessed record losses. Oil prices fell more than 4 percent.

While the stock market in China has recorded a loss close to 9 percent, it was the sharpest decline since the financial crisis in 2007.The indexes that were positive by 50 percent in June compared to the beginning of the year, have retreated to the Christmas time levels.

Asian stock markets, on the concern of the ongoing decline of China's stock market in three months is going to be out of control, went down to the bottom of last three years. Losses in the European stock markets exceeded 6 percent during the day, thus experiencing the most drastic decline since the most severe period of the global financial crisis of October 2008.

The problems in China are not only limited to the stock market; the country has accumulated a lot of serious problems. Previous growth rates in China could not be sustained. With the devaluation and the gradual deterioration of the data, the market began to see it clearly. Even if the Bank of China takes the necessary steps, it will not change this fact. China will replace the preceding 10 years of growth model. While replacing it, she will decrease her economic growth rate to 3 or 4 per cent. A choice can be made between a sudden decline and a decline spread over time but she does not have an alternative as to not decline. But if they lose the control of Yuan's adjustment, it will be a very dangerous phenomenon for the world: China will begin exporting deflation. The producer inflation rate is already very negative since 42-44 months. This could bring a harder wave of deflation. The Fed will increase interest rates in September. America will enter a crisis without increasing interest rates.  There is already now a crisis in emerging markets. Global trade is expected to have the lowest growth of the last 10 years. There is an economic crisis coming from emerging markets. US can protect herself for a year or a year and a half but not more...

CAN CHINA LEAD THE WORLD INTO A NEW ECONOMIC CRISIS?

The Chinese slowdown could plunge the world into a new crisis, many economists believe. Is China so bad, and does she have such a power of influence?

When China will fall asleep ... the world will tremble. The Chinese recession, if confirmed, will drag that of Brazil, which will cause the same for the US and Europe. The expected Chinese slowdown will have colossal consequences, since China makes up a third of global growth since the beginning of the century. China is seriously ill, and the global contagion is inevitable.

China's growth is slowing. Even if it falls to 6% or 5% this year, one can not speak of recession. This is a relatively difficult transition between two growth schemes. Since 2011, China is trying to be less dependent on exports and develop its domestic market. Domestic demand remains weak, however.
This slowdown questioned China's ability to switch to an endogenous growth. The economy has excessive debt, speculative bubbles have multiplied. China has failed to initiate something virtuous on the domestic front. Meanwhile, the rise in wages that made its exports less competitive, forces it to devalue its currency to boost its foreign trade. China is in midstream, not knowing in which direction to turn.

Perhaps it is only a crisis of growth. But why China would lead the world into turmoil, starting with Brazil? Brazil is already in recession because of China. The growth was led between 2005 and 2012 by massive raw material exports to China. The decline in Chinese imports has been fatal. In return, Brazil imported Chinese products, contributing to the dynamics of world trade.

This dependency of China is evident in the case of Brazil, but it is the case in all countries. China accounts for 11% of imports in world trade. When it slows purchases, all exporters receive a kickback. This is the case of Germany, particularly exposed, where industrial productivity has been falling since 2011 and Europe is indeed threatened: one can not say that emerging countries need to support Europe's growth by purchasing their products. China's closure feeds a judgement of globalization.

China's influence on emerging markets is considerable, and the global economy is not going very well. Europe is a big stone. A new crisis is not impossible, but a return to recession could come from many poles. The eyes of the world have turned to the United States, where growth occurred for the last six years. Or to India, cited as a possible relay of China.

If China's failure does not necessarily plunge the world into recession, it seems to question the model of growth driven by trade flows. There will be more growth in the manner of the past. Anyway, the world has achieved the environmental limits; the Tianjin explosions just remind it.

THE WORLD ECONOMY: DEPRESSION OR RECOVERY?

THE WORLD ECONOMY: DEPRESSION OR RECOVERY?

In the financial circles, a story is being told regarding the world economy emerging from the long recession it had entered after the financial crisis. But what is happening in China's economy with the last week's unexpected devaluation and the state of the labour market in the OECD countries refute this story.

Until last week, the Chinese currency Yuan was considered to be overvalued by 15 percent against the dollar. When this level of the Yuan was coupled with the economic growth, it served as a control valve of the deflationary pressure (lack of demand) in the world economy. The devaluation of the Yuan by more than 3 percent last week shows that this valve has been broken and the Bank of China is warning that there could be a continuation of strong fluctuations regarding the value of the Yuan. 

Despite that the Chinese officials try to show that the devaluation is "a reform to facilitate the functioning of the market economy", one can  easily reach a different conclusion. First, the devaluation is not suitable for the Chinese government' project of redesigning the economy towards the domestic consumption, other than encouraging exports. On the other hand,   in today's world economic environment, one cannot expect to have the devaluation to make a significant contribution to China's exports nor to the growth based on investment. 

Second, this devaluation  is an expression of the crisis of capitalism in China. July data show that the growth rates of industrial production, exports, fixed capital investments and retail sales are falling. In short, while the economic growth is going towards below the projected 7 percent, the deflationary pressure and excess capacity problem is getting more pronounced.

Because the Chinese government has chosen the devaluation as a solution and as a tool to encourage exports, one thinks that she has chosen to "export" the deflation at the same time. This devaluation will not only have adverse effect upon the export capacities and growth of the countries in the region, it will also have a negative impact upon Europe's and United States' economies as well as upon the financial stability. The probability that United States' economic growth falls below 2 percent will delay Fed's decision to raise the interest rates and will strengthen the instabilities in the financial markets. In short, the economic recovery story is far from being true.

The story of "recovering from the recession" is also supported by certain declines in the unemployment rates. In reality, not only the unemployment rate is still far below the pre-crisis levels, but also the "recovery" burden of this story, which has a dark side, is imputed upon the workers, especially upon the young people of 15-24 age group. 

Within the newly created jobs, the temporary jobs, which are not standard, while representing 33.4 percent across the OECD, Italy, Greece and Spain have figures that go beyond 40 percent. This ratio is 38 percent in Germany, the strongest economy of Europe. The share of temporary jobs in the total new employment in the 15-24 age group, can reach 69 percent in Spain and 53 percent in Germany. And the chance of the persons who enter into the temporary job market to jump to a permanent job is less than 50 percent. Finally, the average income of workers in temporary jobs is lower than the employees of the permanent jobs. Across the OECD, 22 per cent of family workers in temporary jobs live below the poverty line. 

In summary, OECD is dominated by low growth, high and fragile unemployment, impoverishment and deflation... This situation is not called "recovery" but depression. 

THE YUAN IN PERSPECTIVE: THE PATH TO A NEW GLOBAL CURRENCY AND NOT A CURRENCY WAR.

THE YUAN IN PERSPECTIVE: THE PATH TO A NEW GLOBAL CURRENCY AND NOT A CURRENCY WAR.

Chinese currency Yuan has lost 1.8 percent on Tuesday, losing 1.6 percent Wednesday. This exchange rate movement  is considered as being the highest daily rate movement since 1994. This movement involves more than a devaluation; it is likely that it is an effort to open the door to  the floating exchange rate regime, that is the "world currency".

The reason why the world had raised the eyebrows when saying "China launches currency war",  was the appreciation process that had continued for a long time; did China change its decision?
Did China support the idea of providing a stimulus to its exports and growth through devaluation which has seen its export fall by 8.3% in July compared to the previous year, its economic growth shrinking to the lowest on the last 10 years to the figure of 7.4%?

This step is a strong probability; it suggests that China's strict foreign exchange regime, which magnifies the wave of reforms in recent years, is approaching the brink of leaving the Yuan to fluctuate in free market conditions. In the medium term; she will increasingly open the currency band and will allow the establishment of the value of money in market conditions.

Yuan did not reflect the country's economic equilibriums for a long time; China's government, even though the country has a surplus of foreign trade, made an effort to keep the money worthless. Despite its huge trade surplus against the US dollar in nominal terms during the period from 1995-2005 the money was kept constant at 8:27. During the 2005-2008 crisis, under the pressure of the US administration with the blame of currency manipulator, she has permitted a controlled appreciation of its currency. Yuan, which approached 6.82 by the end of 2008, stayed there until May 2010. After June 2010, its resumeD its appreciation process; it appreciated up to 6.05 by the end of 2013.  With the wave of reforms at the end of 2013, from the beginning of 2014, it was observed that she allowed a loss of value in its currency from time to time. It closed at 6.21 on Monday against the dollar, it dropped to 6.44 with the depreciation that occurred on Tuesday and Wednesday.

The Bank of China set a mid-point in its currency rate on a daily basis and allows the currency rate to fluctuate up and down by 2 percent. When the midpoint shifts, than the currency rate fluctuates in the band that was set up around the centre. The following day's currency rate which is determined according to the previous day's official currency rate (mid-point), the Bank of China has declared on Tuesday that it will be determined according to the "previous day's market closing". This has created a currency bounce, of course, but it will result in the currency rate being determined by the market conditions.

The Bank of China will probably expand this band which is determined now by the market conditions and Yuan will reach its value under the market conditions without intervention. The currency rate will thus drop or rise.

As China approaches the free exchange rate regime and also removes the currency exchange controls, Yuan will start to become an international currency. In this regard, this development which is seen as a devaluation, must be an important gateway to the convertibility transition of China. The allowance given to such a currency move in China has been described as a devaluation; it was an unprecedented overnight high loss of value.

This exchange rate movement in China, triggered the depreciation in neighbouring countries. The currencies of the giant countries such as Malaysia, Korea and Indonesia have lost roughly 2.5 percent. But China's impact will gradually decrease. Bank of China's intervention which happened yesterday and where she intervened by selling against the depreciation of the Yuan, reveals that the Chinese government's aim by changing the system determining the exchange rate does not carry the intention of devaluation. As this becomes clear, the reflections upon other countries will disappear.

Ultimately on Tuesday, China has opened the window  of a new global currency...