The coming crisis for emerging markets and a strengthening of the dollar?

The coming crisis
By Rohit Chawdhry

The greatest threat to the emerging markets is China, where a crashlanding would have far-reaching implications beyond Asia. We could then expect global risk appetites to plummet, emerging market currencies to fall and interest rates to rise - and the dollar to strengthen. A number of factors tend to precipitate emerging market crises....



NEW DELHI - In the past few years, expanding global liquidity has fueled global economic growth. The global economy expanded at an annual average of 4.5% for the period 2003-2004, representing the fastest growth rate since after the Iranian revolution, in the early 1980s. This period saw growth outpacing the United States's productivity boom phase of 1994-1999. Not surprisingly, growth in global corporate profits accelerated, resulting in a synchronized rally in world financial markets.

However, the party may just be coming to an end as global growth is likely to decelerate significantly this year. Why? It's US Federal Reserve Board chairman Alan Greenspan again, who is tightening the tap on global liquidity through interest rates that will eventually result in slower growth for the world this year. Evidence for this can be seen from the shape of global yield curves that imply slower growth rates ahead. Further, the lagged impact of crude oil prices was not felt in 2004, but will be in 2005. Overall, a simple regression model based on the above variables would not yield world growth of more than 3% - which represents a sudden deceleration in economic as well corporate earnings growth rates this year. Noteworthy is the 35% drop in 256 MB DRAM prices (a good proxy for semiconductor prices as well as economic activity) since the start of the year. It is getting increasingly evident that the global growth environment is deteriorating faster than most market participants imagine.

How does a deceleration in global growth impact emerging markets? Historically, Asia and Latin America tend to show higher volatility in the event of global slowdowns as their economic growth rates decelerate at a faster pace than developed ones. A 3% global growth rate is unlikely to yield a gross domestic product (GDP) growth rate of more than 6.5% for India for 2005. On the same count, Asia minus Japan, which grew at 7.3%, is not expected to register more than 6% growth in 2005. Further, if China were to land hard, then one arrives at 5% for Asia sans Japan.

China's effort to cool down its economy has been a topic of debate among policymakers and analysts. The Chinese economy has been growing at a spectacular pace for more than a decade, registering an average growth rate of 9.6% from 1991 to 2004. While the consensus among market participants has been that the Middle Kingdom would indeed be able to engineer a soft landing, the fact is that it is unusual for a country with such growth rates for long periods not to crash land now and then....cont'd

http://www.atimes.com/atimes/Global_Economy/GD22Dj01.html

Two little factoids which glare from this piece. One is that the growth rates in the emerging markets are significantly higher than those of the US, no matter what "dire" scenario you look at. And second, the conflation of world growth and endless Fed pumping under Greenspan. Greenie knows that the only thing holding up the sham American debt bubble is greater amounts of fiat money.

It is interesting to note that the era of US "productivity boom" cited was concurrent with the Government's decision to change how they calculate inflation. Since inflation must be backed out of nominal growth to get real growth, lowering inflation increases real growth and thereby productivity. The late 90's economic miracle was as much a statistical creation as anything else. But then, when your whole cover story is based on financial air, what would you expect.

In other words, the reality is that the US is fueling the world's growth through fake stimulation of final demand which the emerging markets are using to build long term economic competitiveness. To put it simply, they are saving and investing with our fake money while we are consuming with our fake money. They are capitalists, we are on the welfare dole. When they no longer need to rely on us as the final end-all demand market, the noose is effectively put around our neck.

They will hold our debt, our manufacturing capability, and will be in a position to challenge the world's reliance on the US dollar reserve financial structure which has given the US free reign to consume on someone else's dime.

Translation...the party's over.

Very well put, the consentrated essence of truth expressed as clearly and shortly as possible.

Fri Apr-22-05 08:26 PM

U.S. group lauds Bush call to devalue yuan


http://feeds.bignewsnetwork.com/?sid=45e6f3eb908a1627

Big News Network.com Friday 22nd April, 2005 (UPI)

U.S. manufacturers Friday praised concerted efforts by the Bush administration this week to push China and other Asian nations to devalue their currencies.

The Coalition for a Sound Dollar, a group supported by the National Association of Manufacturers, said it was particularly encouraged by the fact that the Bush administration wanted to see China's currency to reflect its true value as quickly as possible.

Currency analysts argue that China is deliberately keeping the value of the yuan low in order to have a competitive edge in the export markets, with some analysts estimating that the yuan is about 50 percent weaker than its true value. A weaker currency makes products made in China cheaper and thus more attractive in the global marketplace.

more...

If the Chinese currency was to devalue its competitive advantage with the US dollar would just get bigger.

It's not the yuan, silly


Apr 14, 2005

It's not the yuan, silly
By Francesco Sisci

BEIJING - First, they said it must be devalued. Now they want it to be "revalued".

It was the eve of the 1997 Asian financial crisis when the world first raised the chorus for yuan's devaluation. The logic of the markets then: the economy is in a shambles and the banks have run up unmanageable debts; if the yuan is not devalued, Chinese exports would soon become too expensive to hold their position and foreign capital would stop flowing into the country.

The Chinese government then thought there was little to gain from devaluation. It would trigger another round of competitive devaluation from other Asian currencies, which would eat into the newfound advantage of the yuan. So Beijing decided to hold on to its fixed peg to the dollar and boost exports by cutting taxes on exporting companies so that commodity prices went down in dollar terms. The strategy won. Asian currencies stabilized, the dollar went slowly down vis-a-vis other Asian currencies and the new kid on the block, the euro.

The lesson that China learned was that with currencies, one should not lose one's head, even if everyone else in the market is losing theirs. This is a lesson worth keeping in mind amid today's chorus for revaluation. Pundits point at China's long-lasting trade surplus, the gains in its labor productivity, the bulging foreign reserves, the low inflation rate and the country's contribution to global growth to draw the conclusion that yuan is going too cheap. Among their many arguments: a can of Coke or a Big Mac in China costs half of that in the United States, hence the yuan must go up 20-40%. ...cont'd

http://www.atimes.com/atimes/China/GD14Ad05.html

The problem for the Asian economies is that their industrial strategy is very much built on exporting goods and services to the US and other western countries. If these markets collapse due to a recession induced by higher interest rates then they are not going to escape the fall out. In order to sustain their economies countries like China need to tap their own domestic consumption as well. There are signs that this is beginning to happen but the pace has been painfully slow. With current growth rates of 9.5% there must be concern that the Chinese economy is overheating. This would mean that a lot of capital is being diverted into malinvestment in productive capacity that may never be profitable. As a consequence a lot of the loans put out by the Chinese banks are probably not going to get paid. A major financial crisis in Asia is therefore not impossible. Should that occur then the flow of cash from the Far East into the US Treasury bonds etc is going to get cut off. This could be the queue for the USA's teetering pile of debts to come crashing down.

http://www.nzherald.co.nz/index.cfm?c_id=3&ObjectID=10121828

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