When their economies ran off the rails in the aftermath of the financial crisis, eurozone countries like Greece, Spain, Portugal and Ireland found themselves trapped in a currency that refused to decline in keeping with their prospects.
China is not caught in that same trap. Ultimately, that's a good thing for everyone.
From the way stock and commodity markets reacted after China's surprise devaluation of the yuan, you might have thought the country's sudden change of heart about its exchange-rate policy was the first step on the road to disaster. But it is also a step that we have wished eurozone nations could take in order to let their downtrodden and less-productive economies begin to revive themselves.
Both of these reactions can't be correct at the same time. In all likelihood, it was the initial reaction to China's action that was wrongheaded.
In fairness, it wasn't so much that the yuan was abruptly reduced by 2 percent against the dollar, or that it continued to slide in the days that followed (though braked by repeated interventions by the Chinese central bank), that spooked the markets. The markets mainly reacted instead to the Beijing authorities' apparent concession that their economy, which they have hitherto bragged is essentially recession-proof, is struggling more than they are willing to let on. But we already knew that.
In fact, China is no more immune to the business cycle than any other country. It is entirely possible, if not likely, that the nation's political and economic rigidity will make the eventual adjustment much more extreme, perhaps on the order of what Japan endured after its property bubble burst at the start of the 1990s.
Economists outside China have debated what served as the immediate catalyst of Beijing's decision to devaluate its currency. There are a variety of potential causes. For instance, China has pursued a bid to get the International Monetary Fund to recognize the yuan as a reserve currency; letting the markets steer the yuan more directly indeed drew cautious praise from the IMF. The devaluation also followed news of decreasing exports and shrinking currency reserves, both of which this move might help.
Nobody will benefit if the wheels fall off the Chinese economic locomotive entirely. So any hint of true flexibility, such as the government's decision to allow the yuan to move toward a more appropriate level, is a good thing. The moaning that immediately arose from some quarters here in the United States about "currency manipulation" and unfair policy is largely bogus. It was the yuan's artificial tie to the dollar, which has appreciated sharply against other European and Asian currencies in countries where China sells most of its goods, that was the true manipulation - and the Chinese were essentially manipulating it to their own detriment. Of course they will stop doing that as soon as it hurts them. At the very least, they will try to mitigate the manipulation's effects.
China almost certainly does not plan to allow big swings in the yuan's value, even now. The yuan's daily trading value is restricted to 2 percent above or below a rate set by the People's Bank of China, and that restriction seems unlikely to change. But by moving that band significantly, Beijing has tacitly admitted a need for a slightly closer correlation between their currency's value and their economy's reality. It's a start.
There is a lot wrong with the Chinese economic and political system. The idea that its economy can only move in one direction is false, and always was. China isn't recession-proof. It's just that anyone in China who has the nerve to declare a recession is in progress, if and when one comes - in fact, that day might already have arrived - is apt to be fired at best, or even jailed. So nobody says it. But that doesn't mean it won't happen anyway.
The Chinese currency adjustment is not exactly what we'd call market-friendly, but at least it is a nod to reality and a constructive step that we would have urged on almost any other nation in similar conditions. If you want to worry about China, there are much better targets for that worry than the overdue and thus-far modest drop in the value of its currency.
Saturday, 22 August 2015
Friday, 14 August 2015
Friday, 17 July 2015
Modern Global Economy 2015
Globalism is here to stay and in an overtly simplistic view I shall attempt to illustrate how markets today have become so inter-linked.
Firstly, at the heart of the modern global economy are the equities markets. The modern corporation is the engine of all economic activity. it combine resources, employs capital and labor and utilizes entrepreneurship to make markets happen and deliver goods and services to consumers. The Dow Jones Industrial Average is the chief barometer of global corporate activity. People in Tokyo love to eat a Mcdo's or KFC just as much as people in Mumbai wish to pay for goods with their Citibank credit card, or drive their new Ford in London or even buy a nice new G.E refrigerator in Amsterdam. When people in Milano stop ordering their Starbucks and people in Paris stop buying Apple items, then global corporate cash-flows become affected and equities values plunge on drop in earnings. Similarly, companies on the European exchanges best summed up through Euro Stoxx 50 for the top European companies have cash-flows in USA, China and everywhere else which can be jeopardized by consumer sentiment.
Secondly, global interest rates provide credit lines to companies to grow. Key interest rates are the US Dollar rates determined by the Federal Reserve. When Interest rates in the USA go up as they have been preparing for over the last 3 months, then equities investors get nervous because companies will have to face higher borrowing costs. Bond investors also will not be happy to see US interest rates go up because of the inverse relationship between interest rates and prices; when interest rates goes up prices of bonds go down.
Thirdly, the value of the dollar is very important to the global economy because most commodities and raw resources like crude oil are quoted in terms of US Dollars as is gold bullion. when the US Dollar is cheap in value relative to the Aussie Dollar or Swiss Franc or Euro currency, then more of the US Dollar currency unit can be purchased and demand for commodities increases. When the value of the US dollar increases it then becomes more expensive to acquire a barrel of crude oil and an ounce of gold bullion. Also when the US Dollar is expensive it becomes more expensive to purchase US stocks and bonds.
Thus in this simple explique we can truly understand the nature of the global economy where events in one region can affect the other. This is because today large corporations around the world have been driven to internationalize in the search for increased sales and higher market value.
Firstly, at the heart of the modern global economy are the equities markets. The modern corporation is the engine of all economic activity. it combine resources, employs capital and labor and utilizes entrepreneurship to make markets happen and deliver goods and services to consumers. The Dow Jones Industrial Average is the chief barometer of global corporate activity. People in Tokyo love to eat a Mcdo's or KFC just as much as people in Mumbai wish to pay for goods with their Citibank credit card, or drive their new Ford in London or even buy a nice new G.E refrigerator in Amsterdam. When people in Milano stop ordering their Starbucks and people in Paris stop buying Apple items, then global corporate cash-flows become affected and equities values plunge on drop in earnings. Similarly, companies on the European exchanges best summed up through Euro Stoxx 50 for the top European companies have cash-flows in USA, China and everywhere else which can be jeopardized by consumer sentiment.
Secondly, global interest rates provide credit lines to companies to grow. Key interest rates are the US Dollar rates determined by the Federal Reserve. When Interest rates in the USA go up as they have been preparing for over the last 3 months, then equities investors get nervous because companies will have to face higher borrowing costs. Bond investors also will not be happy to see US interest rates go up because of the inverse relationship between interest rates and prices; when interest rates goes up prices of bonds go down.
Thirdly, the value of the dollar is very important to the global economy because most commodities and raw resources like crude oil are quoted in terms of US Dollars as is gold bullion. when the US Dollar is cheap in value relative to the Aussie Dollar or Swiss Franc or Euro currency, then more of the US Dollar currency unit can be purchased and demand for commodities increases. When the value of the US dollar increases it then becomes more expensive to acquire a barrel of crude oil and an ounce of gold bullion. Also when the US Dollar is expensive it becomes more expensive to purchase US stocks and bonds.
Thus in this simple explique we can truly understand the nature of the global economy where events in one region can affect the other. This is because today large corporations around the world have been driven to internationalize in the search for increased sales and higher market value.
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