Fear of Fed and China slowdown take a toll

LONDON Sun Jul 14, 2013 2:20pm EDT

Federal Reserve Chairman Ben Bernanke speaks at a meeting of the National Bureau of Economic Research in Cambridge, Massachusetts July 10, 2013. REUTERS/Dominick Reuter

Federal Reserve Chairman Ben Bernanke speaks at a meeting of the National Bureau of Economic Research in Cambridge, Massachusetts July 10, 2013.

Credit: Reuters/Dominick Reuter

LONDON (Reuters) - Emerging economies that have thrived on ultra-loose U.S. monetary policy and insatiable Chinese demand for natural resources are in for another rude wake-up call this week.

The twin tailwinds are not turning into outright headwinds. Federal Reserve Chairman Ben Bernanke will explain - yet again - in two days of congressional testimony that his plan to buy fewer bonds is not the same as raising interest rates.

And while China's days of double-digit growth are over, data on Monday should show the world's second-largest economy expanded around 7.5 percent in the second quarter from a year earlier - a pace most countries can only dream of.

Still, the trends are clear, and they make an uncomfortable backdrop for a meeting in Moscow of finance ministers and central bank chiefs from the Group of 20 leading economies.

The International Monetary Fund last week revised down its global growth projection for this year by a quarter-point to 3.1 percent, which Bart van Ark, chief economist in New York with the Conference Board, a business research group, said was between one and 1.5 percentage points below potential.

The U.S. recovery, though weak by historical standards, is putting down roots, as housing starts and retail sales figures for June are likely to demonstrate.

"Fed policy might be right for the United States. The question is whether it's right for the rest of the global economy," van Ark said.

"Can the patient can be taken off the life support that central banks are giving them and moved into rehab? I think it's very questionable whether some economies are ready for that. And the biggest risk in that respect is emerging markets," he added.

Capital outflows top the risk list. Indonesia and Brazil raised interest rates last week, India tightened derivatives trading rules as the rupee plunged to a record low and Turkey's central bank was a big seller of dollars to defend the lira.

Brian Reading with Lombard Street Research, a London research firm, added sagging commodity prices and slack final demand in advanced economies to the litany of woes.

"Developing countries face a triple whammy - falling markets, falling prices and diminished capital inflows, particularly if interest rates in developed countries chase U.S. rates higher," he said in a report.

SPEAK CLEARLY, BEN

No wonder that G20 host Russia is anxious that an abrupt withdrawal of monetary stimulus by rich-country central banks, especially the Fed, could spell turmoil for emerging markets.

"I think everyone will be against any sudden changes in currency exchange rates and monetary policies," Finance Minister Anton Siluanov told Reuters.

Bernanke has sought to allay such concerns by setting out an indicative timetable for phasing out the Fed's bond buying while stressing that policy will remain loose for a long time.

Some market watchers have praised the Fed chief for his transparency and clarity.

But Steven Ricchiuto, chief economist with Mizuho in New York, said Bernanke's attempt to convey the nuanced views of the Federal Open Market Committee (FOMC), the Fed's policy-setting panel, had turned into a public relations nightmare.

"Market participants prefer sound bites. As such, the more the chairman tries to explain the FOMC's position on tapering and policy accommodation the more he confuses the message," Ricchiuto said.

If that's the case, then Bernanke is not alone.

Chinese Finance Minister Lou Jiwei had economists puzzled after he said China could meet its 7 percent growth goal but that should not be considered the bottom line.

The confusion arose because the Communist Party set a 7.5 percent growth target for 2013 as recently as March, while its current five-year plan for 2011-2015 is based on expectations of 7.0 percent annual growth.

Sure enough, the official Xinhua news agency carried a correction on Saturday, clarifying that Liu had actually said, "There is no doubt that China can achieve this year's growth target of 7.5 percent".

SECOND-GUESSING CHINA'S COMMUNIST PARTY

Cutting through the fog, it is clear that Beijing's new leaders are serious about rebalancing the economy away from investment and will tolerate slower growth in the process.

Ting Lu, Bank of America Merrill Lynch's China economist, said before Xinhua's correction that he suspected there had been a misunderstanding over the timeframe for Liu's 'growth floor' remarks and that this year's floor would remain 7.5 percent.

But he added: "We think it's quite possible for the government to set the growth target in 2014 at 7.0 percent, and we do predict that growth will slow to 5.0-6.0 percent towards the end of this decade."

Derek Scissors with the Heritage Foundation, a Washington think tank, said GDP was a misleading indicator of China's economic health; it was more important to track the progress of reforms and indicators of efficiency, notably the return on capital.

He said he was encouraged by Beijing's efforts to reel in credit, but a sterner test would be its capacity to curb wasteful investments by state-owned enterprises.

"If they stop doing that, that's step one in creating a sustainable growth trajectory," he said.

Scissors said a key Communist party policy-setting meeting this autumn was unlikely to endorse sweeping changes due to opposition from vested interests.

But he saw more than a 50-50 chance of a significant reform being implemented in 2014 - for example, making it easier for migrant workers to settle in cities or punching a hole in China's capital controls.

"You're not going to reform on all fronts at the same time," Scissors said. "But I think we can get a healthier economy than we have now a year from now: the reform process will have started and started to help the economy," he said.

(Editing by Jeremy Gaunt.)

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Comments (2)
2Borknot2B wrote:
“”I think everyone will be against any sudden changes in currency exchange rates and monetary policies,” Finance Minister Anton Siluanov told Reuters.”" Well Anton, I hate to tell you this, but “it” isn’t up to you. “”Also, Chinese Finance Minister Lou Jiwei had economists puzzled after he said China could meet its 7 percent growth goal but that should not be considered the bottom line.”" Really? China, a 7% “imaginary growth” you mean to say. Just look at all the damage that was done to your country. I wonder how that will effect your bottom line? I wonder how all the other damage your going to get will effect your bottom line?

Jul 14, 2013 2:42pm EDT  --  Report as abuse
China slower growth has many causes, rebalancing of the economy from investment/industry driven to services/consumption driven is not the most important. Dminishing net exports and recession in developed countries is the second most important.
The most important is the scarcity of resources: mainly crude oil, next coal and natural gas. In 2012 China consumed over 50% of world coal production, over 4 billion Mt. It can’t be more than 5 maybe 6 billion Mt till 2030 without large increase in coal price on overseas markets. In 2002-2012 period world consumption of crude oil increased by 11m barrels/day, China’s contribution was over 5 milion.
Without careful policies China’s consumption will explode from 10m in 2012 to over 15m even 17m barrels/day before 2020 and the price of crude oil will explode to 200 USD/bbl. The same with natural gas, now purchased at low average of 200 USD/1000 m3. So the need of slowdown and very prudent economic and monetary policy to prepare country, have a room for change in case of sudden external resources shock. The imports of food will increase in the future becoming substantial.
China is the first country becoming developed that has to consider planetary effects of its policies. Simple rule of thumb: any upper middle income country (China in 8-10 years) uses over 1 Mt of hydrocarbons / per capita, mainly crude oil – that means for China 22-24m bbl/d of crude oil and 300 billion m3 of natural gas, but there is not enough at present for such consumption. China needs to futher develop hydro power (450-500 GW and 1500-2000 TWh) and nuclear power (200 GW and 1500 TWh) before it becomes developed country in 2025-2030 it is simple and obvious for their planners.
So the slowdown do not mean slowdown of investment or modernization of country. Investigate carefully and you will notice that pace of copper consumption has not diminished and steady growth of about 10% is observed. Why ? Because in this case resources are definitely finite and the copper will never be cheap again. And China needs over 50% of known world economic resources – about 300 milion tons of copper to finish industralization, mainly massive construction and smart power grid completion. The would be no copper left for industralization of India, Indonesia or Africa and Chinese know that.

Jul 14, 2013 4:46pm EDT  --  Report as abuse
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