Resilient China is firewall in emerging currency crisis

China itself still boasts a strong foreign reserve position and has taken steps to cut debt, both useful shields against global turmoil. (File/AFP)
Updated 16 September 2018
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Resilient China is firewall in emerging currency crisis

  • Emerging countries — loosely defined as having fast growing but volatile economies — have seen their currencies battered in recent weeks
  • China, the world’s second-biggest economy and itself categorized as an emerging market, doesn’t share a key downside of the worst-hit countries

PARIS: China is the last bulwark against a deep crisis in emerging economies going fully global, analysts say, although a prolonged trade war could sap Beijing’s defenses.
Emerging countries — loosely defined as having fast growing but volatile economies — have seen their currencies battered in recent weeks, plunging their finances into turmoil, and raising fears of global contagion.
But China, the world’s second-biggest economy and itself categorized as an emerging market, doesn’t share a key downside of the worst-hit countries: their rampant current account deficits.
“The possibility of a currency crisis in China is unlikely,” said Guan Qingyou, chief economist at China’s Rushi Advanced Institute of Finance.
“China’s ability to resist risk is relatively strong.”
Current account deficits must be financed with foreign currencies, and as central banks across the world enter a cycle of tighter monetary conditions, especially the powerful US Federal Reserve, cheap money will become scarce.
Higher US interest rates are “another nail in the coffin” for emerging countries needing external financing, said Lukman Otunuga, a research analyst at FXTM.
A meltdown of the Turkish lira — somewhat stemmed by a recent massive interest rate rise — and the Argentinian peso are cases in point, as both countries have “exceptionally large current account deficits,” said Oliver Jones, markets economist at Capital Economics.
South Africa, Colombia and, to a lesser extent, India and Indonesia are in similar danger of being trapped in Fed rate rise pain, he said.
But the currencies of Korea, Thailand and Malaysia have done much better because of their close trade ties with Beijing and their healthier current account positions.
China itself still boasts a strong foreign reserve position and has taken steps to cut debt, both useful shields against global turmoil.
“Our foreign exchange reserves are still relatively high,” said Guan at the Reality Institute. “In addition, China has already started the process of deleveraging after the end of 2016.”
But even if fundamentals are still holding up, only the very brave dare predict how damaging ongoing trade tensions with the United States will be to China’s position.
Recent tentative signs of improving relations between Washington and Beijing have lifted investor spirits, but the threat of the US imposing fresh tariffs on Chinese imports worth $200 billion still looms large.
Christine Lagarde, managing director of the International Monetary Fund, warned recently that higher US-China tariffs would have a “measurable impact on growth in China” and “trigger vulnerabilities” among its Asian neighbors.
While her staff did not yet see contagion spreading beyond the countries currently fighting investor flight, the escalating US-China trade spat could deliver a “shock” to emerging markets, she told the Financial Times
But in the meantime, said Joydeep Mukherji, an analyst with S&P Global, said “we are not forecasting a major crisis in emerging markets.”
Perhaps inspired by the 10th anniversary of the global financial crisis, economists have started to wonder whether there could be another worldwide meltdown, this time triggered by highly-indebted emerging countries.
For now, the answer appears to be no.
“China can still cope with its debt due to its high savings rate,” said Holger Schmieding, an analyst with Berenberg.
“Some other emerging markets are in trouble. Fortunately, they are simply not big enough to cause a big new global crisis.”


Gulf defense spending ‘to top $110bn by 2023’

Updated 15 February 2019
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Gulf defense spending ‘to top $110bn by 2023’

  • Saudi Arabia and UAE initiatives ‘driving forward industrial defense capabilities’
  • Budgets are increasing as countries pursue modernization of equipment and expansion of their current capabilities

LONDON: Defense spending by Gulf Arab states is expected to rise to more than $110 billion by 2023, driven partly by localized military initiatives by Saudi Arabia and the UAE, a report has found.

Budgets are increasing as countries pursue the modernization of equipment and expansion of their current capabilities, according to a report by analytics firm Jane’s by IHS Markit.

Military expenditure in the Gulf will increase from $82.33 billion in 2013 to an estimated $103.01 billion in 2019, and is forecast to continue trending upward to $110.86 billion in 2023.

“Falling energy revenues between 2014 and 2016 led to some major procurement projects being delayed as governments reigned in budget deficits,” said Charles Forrester, senior defense industry analyst at Jane’s.

“However, defense was generally protected from the worst of the spending cuts due to regional security concerns and budgets are now growing again.”

Major deals in the region have included Eurofighter Typhoon purchases by countries including Saudi Arabia and Kuwait.

Saudi Arabia is also looking to “localize” 50 percent of total government military spending in the Kingdom by 2030, and in 2017 announced the launch of the state-owned military industrial company Saudi Arabia Military Industries.

Forrester said such moves will boost the ability for Gulf countries to start exporting, rather than purely importing defense equipment.

“Within the defense sector, the establishment of Saudi Arabia Military Industries (SAMI) in 2017 and consolidation of the UAE’s defense industrial base through the creation of Emirates Defense Industries Company (EDIC) in 2014 have helped consolidate and drive forward industrial defense capabilities,” he said.

“This has happened as the countries focus on improving the quality of the defense technological work packages they undertake through offset, as well as increasing their ability to begin exporting defense equipment.”

Regional countries are also considering the use of “disruptive technologies” such as artificial intelligence in defense, Forrester said.

Meanwhile, it emerged on Friday that worldwide outlays on weapons and defense rose 1.8 percent to more than $1.67 trillion in 2018.

The US was responsible for almost half that increase, according to “The Military Balance” report released at the Munich Security Conference and quoted by Reuters.

Western powers were concerned about Russia’s upgrades of air bases and air defense systems in Crimea, the report said, but added that “China perhaps represents even more of a challenge, as it introduces yet more advanced military systems and is engaged in a strategy to improve its forces’ ability to operate at distance from the homeland.”