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  • Dec 27, 2014
  • Updated: 10:02am
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Fear grips markets as investors worry about China's growth and US profits

PUBLISHED : Sunday, 26 January, 2014, 5:29am
UPDATED : Tuesday, 28 January, 2014, 5:23pm

Fear is back in the market. Investors are worried about slower economic growth in China, a gloomier outlook for US corporate profits and an end to easy-money policies in the United States and Europe. They're also fretting over country-specific troubles around the world - from economic mismanagement in Argentina to political instability in Turkey.

Those fears converged last week to start a two-day rout in global markets that was capped by a 318-point drop in the Dow Jones industrial average on Friday. It was the blue-chip index's worst day since last June. The Dow plunged almost 500 points over the two days, finishing down 2 per cent at 15,879 on Friday.

The Standard & Poor's 500 index fell 38 points, or 2.1 per cent, to 1,790. The Nasdaq composite fell 90 points, or 2.2 per cent, to 4,128. Markets in Europe and Asia suffered similar declines and bond prices rose.

The turbulence coincides with a global economic shift: China and other emerging-market economies appear to be running into trouble just as the developed economies of the US and Europe finally show signs of renewed strength.

In a number of developing countries, the adjustment to the slowdown of US Federal Reserve monetary stimulus began to accelerate, as traders dumped local currency in Turkey, South Africa and elsewhere - a rout that touched off concerns of a new crisis brewing in one or more of the world's emerging markets.

Many analysts said a gradual end of Fed asset purchases would be offset by a strengthening US economy, because the Fed would not reduce its monetary stimulus otherwise.

However, the managing director of the International Monetary Fund, Christine Lagarde, speaking at the World Economic Forum in Davos, said it could be a " new risk on the horizon".

"It needs to be really watched," she cautioned, amid concerns that emerging-market economies such as India and Brazil are going to suffer as investors pull out their capital.

Analysts play down the likelihood that China's troubles will touch off global problems akin to those caused by the US system. Its capital markets and banks are not as closely interwoven with the rest of the world, and the Chinese government has trillions of dollars in foreign reserves.

But there is still a fear that the world's second-largest economy is facing financial and demographic constraints that could limit its growth and force a correction to its banking sector. "It is interesting how even a mild tremor in China's growth causes such anxiety around the world," Cornell University trade policy professor Eswar Prasad said.

Additional reporting by The Washington Post, Bloomberg


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In the long term, China has to rebalance from an export-led and investment-driven model toward domestic consumption-driven growth.
If successful, China will become a de facto superpower. If not, she'll fall into the middle-income trap.
But this takes a long time to accomplish.
In the short and medium term, investment (high-speed railway and highway construction, airport construction and enhancements, subways, intercity railways, port construction, energy plants for alternative energy sources: wind, solar, and nuclear plants) will remain the core driver of growth.
The recent bad HSBC PMI data show that China's contractionary policy (through interest rate liberalization's higher borrowing rate) is hurting the SMEs.
China can imitate Hong Kong's SME loan guarantee scheme which aims to help SMEs get loans:
SMEs (in China, both manufacturing and services) with less than 50 employees can apply for loans up to HKD 6 milllion for up to six years, and 50% of approved loans are guaranteed by the government.
If the SMEs have fully paid the loans, they could benefit from the scheme one more time, with a guaranteed amount up to HKD 6 million.
SMEs in China provide the greatest source of employment opportunities there.
From (Chinese Readers: ****cn.wsj.com/big5/20140123/bch113509.asp)
and 'Strategic Priorities' by Yifan Hu.
Suspected weakness ensures weakness.
Nothing should be done to cause alarm.
The EM countries may practise temporary exchange control to stop the capital flights.
They may negotiate US$ swap programmes with China (and other countries) to get the needed US$ to quell fear in the market.
Perhaps it’s time for China to act as some sort of lender of last resort in the world’s financial market.
China can borrow the wisdom of Walter Bagehot in Lombard Street.
To avoid panic, Beijing (and the IMF) should lend early and freely (perhaps without limit), to solvent countries, against good collateral, and at (very) high interest rates (to prevent moral hazard).
Even an announcement by China or the IMF may be enough.
Enough though the tumble of the EM currencies is partly caused by the bad data and news of several trust failures in China, Beijing should still go ahead with her reform and do what she should do in her best interest.
What’s at stake is the country’s long-term health, not the world’s short-term benefit.
As was said by FDR, the only thing we have to fear is fear itself.


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