Stick to the basics
Skepticism and pessimism are overwhelming the world economy as it grapples with unprecedented challenges and upheaval. The Chinese economy is at the epicenter of renewed anxiety. Many skeptics believe the Chinese economy has actually slowed to a pace of 2 percent to 3 percent or is headed for a hard-landing. Their concerns stem from the fallout from reckless investments over the last quarter of a century while the economy galloped ahead in the clandestine financial sector. They point to the capital flight and stock market crash as the evidence.
Although the arguments have persuasive grounds, I am on the side of many other economic experts in crossing out the possibility of a hard-landing for China. First of all, Chinese authorities are well aware of the gravity of current circumstances and are taking necessary smoothing steps. Their actions have already reined in some of the shadowy financial and services sectors.
Second, China has maneuvering room left in fiscal, financial and currency policies. An economy with a population of 1.4 billion running at a 6 percent pace is expanding twice or 1.5 times faster than the rest of the global economy. Investors and companies cannot give up a market of that colossal size. A sizable number of weak financial institutions and companies must be cleaned up, but a chain of insolvencies won’t cause the entire economy to crash.
The rest of the emerging category is another concern. The BRICS countries minus China - referring to Brazil, Russia, India, and South Africa - have been hard hit with their economies contracting by nearly 4 percent last year. This year won’t be easier, either. The leading members of the emerging category have neglected structural restructuring during their boom years and stretched too much overseas debt amid low interest rates. But their troubles are not likely to spill over to the global economy, though it could raise volatility in the financial markets and possibly bring about regional crisis.
The Japanese economy also joined the uncertainty list. The world’s third largest economy slipped back to negative-growth in the final quarter that ended in December, making its central bank push the interest rate to the negative zone. Yet the value of the yen shot up amid overall capital shift to safer assets. The movement underscores that regardless of current troubles, Japan will not pose a serious threat to the world economy.
The Bank of Japan is expected to push the interest rate further down in the negative territory while keeping up with its multi-billion-dollar quantitative easing program. Japan’s monetary policy will likely raise the volatility of foreign exchange and financial markets around the globe.
Elsewhere, there are signs of improvements. As the eurozone has somewhat stabilized from the Greek fiscal crisis, it is unlikely to serve as the ground zero for another global financial crisis. In addition, the European Central Bank is expected to announce renewed stimuli actions, including additional large-scale bond-purchase programs and other types of stimuli measures in early March.
The recovery in the world’s largest economy has been steady to allow the U.S. Federal Reserve to end a near-decade expansionary policy and move to raise the federal funds rate in December. The U.S. economy, however, is showing mixed signs lately due to troubles in China and other emerging economies.
The latest developments around the world have made the U.S. central bank rethink and moderate the pace of tightening. Some are betting that it could bring the base rate back to near zero percent. But there is little possibility of the U.S. economy retreating, as low oil prices will help the overall economy.
We are now experiencing unorthodox policies and an economic phenomenon unimaginable in the past. It is why skepticism and pessimism prevail especially in financial markets. At times like these, it is best to stick to the basics and normalcy.
Korea, grouped in the emerging category, also comes under scrutiny by investors. These days, foreign investors take up more than 30 percent of the local bourse. The government must demonstrate confidence through reliable and consistent policies and leadership. At the same time, it must reinforce security to ease concerns about geopolitical risks. The people and politicians must not forget that there has not been a major exodus of capital, rout in the local stock market and downgrade in the sovereign credit rating, despite escalated tensions from North Korea, all thanks to the firm faith in our security based on tight Korea-U.S. alliance.
Translation by the Korea JoongAng Daily staff JoongAng Ilbo, Feb. 22, Page 28
The author, a former finance minister, is an adviser to the JoongAng Ilbo.
by Sakong Il