China’s Economic Slowdown

Nov, 05, 2018

[op-ed snap] Exposing China’s overseas lending

Note4students

Mains Paper 2: IR | Effect of policies & politics of developed & developing countries on India’s interests

From the UPSC perspective, the following things are important:

Prelims level: Paris club

Mains level: Uncensored lending by China to developing countries and its aftermath


Context

Extensive lending by China

  1. Over the past 15 years, China has fuelled one of the most dramatic and geographically far-reaching surges in official peacetime lending in history
  2. More than 100 predominantly low-income countries have taken out Chinese loans to finance infrastructure projects, expand their productive capacity in mining or other primary commodities, or support government spending in general

Underestimated debts

  1. While China in 2016 joined the ranks of countries reporting to the Bank for International Settlements, the lending from development banks in China is not broken down by the counterparty in the BIS data
  2. Emerging-market borrowing from China is seldom in the form of securities issued in international capital markets, so it also does not appear in databases at the World Bank and elsewhere
  3. These accounting deficiencies mean that many developing and emerging-market countries’ external debts are currently underestimated in varying degrees
  4. The international policy community is also in the dark about the incidence or nature of any bilateral debt restructuring agreements between China and its many low-income borrowers

What does this lead to?

  1. Because these are mostly dollar debts, missing the China connection leads to underestimating balance sheets’ vulnerability to currency risk
  2. If the initial increases in external borrowing were underestimated, there is also reason to suspect that the magnitude of the ongoing reversal in capital flows may be larger than is generally believed
  3. The aftermath of commodity price booms and surges in new loans to commodity producers is littered with defaults and other debt-servicing difficulties

Demand-supply estimations of borrowings

  1. On the demand side, the loan surge was facilitated by many low-income countries’ comparatively clean balance sheets
  2. The Heavily Indebted Poor Countries (HPIC) Initiative by the Paris Club of official creditors and multilateral institutions had written off (forgiven) a substantial share of the prior external debts
  3. On the supply side, because there was little or no prior credit exposure to these countries, and because some of the major official creditors were not ready to return to development lending following the HPIC Initiative write-offs, a vacuum in official lending emerged and China filled it

Way forward

  1. Widespread debt-servicing difficulties are on the rise among many of the world’s poorest countries
  2. Borrowers’ external debt obligations may have reached the point where repayment difficulties have begun to emerge, leaving China’s development banks with considerable exposure to risky or non-performing sovereign loans
Apr, 11, 2016

G20 pact does not rule out Japan intervention

  1. Japan: G20’s agreement to avoid competitive currency devaluation does not mean Japan cannot intervene in response to one-sided currency moves
  2. Difference: G20 talks about arbitrary intervention, which is different from responding to a one-sided move
  3. Japan’s comments were based on the G20 understanding that long-term manipulation of currencies is undesirable
Jan, 28, 2016

Remnimbi Devaluation and Stock Market Volatility

Two key drivers of the turbulent global markets are Yuan devaluation and the sharp fall in global commodity prices.

  1. Chinese central bank un-pegged the RMB from the dollar and set a lower starting rate.
  2. It was a clear signal to the market that it wanted the RMB to depreciate and it started to fall.
  3. It also triggered capital outflows and the global market volatility.
  4. Move was perceived to be a “beggar-thy-neighbour” mercantilist move, and other central banks also let their currencies fall.
  5. The voluntary depreciation is  driven by a concern about losing competitiveness.
  6. This creates problems for investors as large currency movements heighten uncertainty and leads to stock market turbulence.
Jan, 08, 2016

China’s yuan move rattles markets, Sensex plunges

China’s surprising move to peg the yuan at its lowest value against the U.S. dollar since 2011, triggered a selloff in global markets.

  1. There are fears that it could trigger competitive devaluation among emerging economies.
  2. The depreciation of Yuan is following the course, as it becomes increasingly market linked, following its induction as a reserve currency by the IMF.
  3. Officials stressed that India has the inherent resilience to deal with such emerging challenges.
Nov, 24, 2015

Implications of yuan’s rise

The expectation that the yuan or the renminbi will acquire reserve currency status is no longer a pipe dream.

  1. The International Monetary Fund (IMF) is poised to approve the inclusion of China’s renminbi (or yuan as it is called) as a reserve currency.
  2. When the yuan is formally inducted into the SDR portfolio, it will be the first new currency to be so honoured since the euro was created.
  3. The important advantage accruing to China is the flexibility in settling all its international obligations with its own currency.
  4. For other countries, the benefit in having another reserve currency is that they can diversify their forex reserve portfolios to include renminbi.
Sep, 04, 2015

G-20 discussions set to focus on impact of yuan devaluation

  1. Competitive devaluation of currency is a major threat to the stability of the global economy.
  2. Economists pointed out that, Chinese devaluation is not of serious consequence to the Indian economy, even in the medium term.
  3. The conference will analyse collaborative measures like developing global safety nets to guard nations from negative spillovers.
  4. The recent devaluation of Chinese currency Yuan has triggered a global financial turmoil, hurting stocks and currency markets worldwide.

Go ahead to check major economic group G20. How it will play crucial role to stabilize Global Economy?

Aug, 15, 2015

Experts divided on impact of Yuan’s devaluation on Indian exports

  1. Some believe that the export competitiveness factors are beyond currency movements.
  2. While others are of the opinion that India can maintain its competitiveness if rupee also declines.
  3. The risk for India comes from two ways: one cheaper imports from China affecting domestic companies and second it would affect India’s exports to other countries.
  4. There have been increased imports from China despite a significant appreciation of the Yuan versus the rupee in the past and experts believe that India should focus on policy related efforts in boosting competitiveness.
Aug, 14, 2015

Calculated devaluation by China

  1. The People’s Bank of China’ consecutive double cuts with 1.9% and 1.6% has sent shock waves around the world.
  2. This double dose had a sharp negative impact on many Asian currencies.
  3. Rupee too slipped down to its 2- year low level, but relatively less affected as compared to its Asian peers.
  4. IMF is optimistic that the Chinese move will help achieve market determined exchange rates.
  5. However, the context of cut is based on the premise of their decelerating economy, due to its excessive dependence on exports.
  6. This step can also be read in light of making Yuan a global reserve currency at IMF.
Aug, 13, 2015

India steels itself to face impact of yuan devaluation

  1. Chinese decision to devalue Yuan will hurt Indian exports as it makes Chinese exports cheaper.
  2. In wake of this, India increased the import duty on certain steel products by 2.5 per cent.
  3. Reason being that prices of imported steel are up to 20 per cent lower than those of domestic products.

Experts believe that the Chinese move could be to satisfy the conditions the IMF had spelt out for granting it reserve currency status and inclusion in the special drawing right (SDR) basket.

 

Aug, 12, 2015

China devalues Yuan by 1.9%

  1. China, which runs a ‘managed float’– i.e, an exchange rate that is managed against other currencies, pegs the yuan against the dollar each day.
  2. China announced that its daily fix will now be based on the closing rate of the interbank forex market from the previous day.
  3. The move is likely to be viewed as the govt intervention to boost the economy as a reaction to the slump in exports, and a recent stock market decline.
  4. Besides worsening the already declining Indian exports, the Chinese move is also expected to widen the trade deficit with India.
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