Emerging Markets Crisis Dragging Down The Global Economy

WASHINGTON – Will emerging markets in crisis drag down the global economy? Probably not. But they have added and will continue to add to the negatives. 

Enormous debt 

Consider this. According to the WSJ, “foreign banks have lent $ 3.6 trillion to companies in emerging markets, and foreign investors hold, on average, 25% of local debt in developing economies”.

Now, a lot of these credits were used to finance added production capacity in key commodities producing industries. But we know what happened. China, after its fantastic, multi-year buying spree simply stopped buying. China cannot absorb more.

And therefore commodities collapsed, dragging down all the investors, and those banks that financed them.

Ripple effects 

That said, it is important to note that this negative trend is not confined to the companies operating in the sectors directly hit. It also affected other unrelated sectors that were hoping to ride the wave of economic growth fueled by the extra revenue created by sky-high commodities prices.

For instance, the WSJ points out that “Indonesian telecom PT Trikomsel Oke Tbk. nearly doubled its debt from 2012 to 2015, as it rushed to open hundreds of retail stores across the country. But the firm’s revenue collapsed after growth in South-east Asia’s largest economy fell to six-year lows” . Now the company cannot pay back its bonds, “and already defaulted on $ 460 million of its debt”, according to the same WSJ story.

Well, this means that there are huge ripple effects, not limited to Indonesia. Indeed, Japan’s Softbank Group, an investor in PT Trikomsel, is now taking losses on account of this failed growth strategy.

Widespread damage 

And this is not an isolated case. The outlook is equally grim for Brazil, South Africa and Australia. So, here we go: bad debt, financial losses, bankruptcies, lower revenue, growing unemployment. Is this mix deadly? Probably not. But it is bad both for the countries affected and for the world.

Emerging countries now account for a larger percentage of the global economy. Much was said about how a new, self-confident middle class capable and willing to spend on more cars, and more consumer goods would help boost the global economy. Well, this will have to wait. These countries are in serious trouble. Amid crises and depreciated currencies, the new middle class is a lot poorer, these days.

So, what does this mean for the global economy? It means another wet blanket on growth. The commodities producing countries and their lenders are in trouble because of lack of demand. This means that they will buy less from the West. Lack of demand in China and elsewhere means lower growth in Brazil. A poorer Brazil will buy less from Europe or America.

China drags down all its foreign suppliers 

By itself this would be bad, but not catastrophic. But here is the thing. China financed its gigantic investment spree with astronomic levels of new debt. This debt will never be recovered, simply because the investment-driven bubble burst.

So, what does this mean? Well, China sits on enormous cash reserves, so it can weather the storm. Still, this capital will be used to plug holes rather than fund productive investments. As China slows down, its under performing economy drags down all the Asian countries that have become an integral part of China-centered supply chains. Think South Korea, Taiwan, Thailand, and also Japan. Their exports to China are down.

Is America insulated from all this? 

Where does this leave America? Much has been said about the fact that the US economy is not so dependent on exports. Many US firms trade domestically, say between Connecticut and Colorado. Not many depend on exports. And US banks are not exposed to Chinese debt.

Still, as the whole world slows down, rather fast, can the US be the only island of growth and prosperity? I doubt it.

China Worries Fostered By Unreliable Government Data

WASHINGTON – What’s going on in the Chinese economy? Nobody knows, really. We get bits and pieces; but not the complete picture. There is a real estate glut in the secondary cities. There has been slow growth. We know that imports and exports are down. We know of massive over capacity in some basic industrial sectors, especially those that support construction and infrastructure (cement, steel and copper).

Ponzi Scheme? 

But we do not know the whole story. There is no open debate on the economy, or policy choices, let alone a clear depiction of the actual state of troubles sectors. In fact, independent reporting on the economy and financial markets is expressly prohibited.

And precisely because nobody knows, when something strange happens, like the recent Shanghai stock market mini crashes, (that now amount to a significant correction), at the very start of the new year, many analysts fear the worst.

The truly scary (still hypothetical) scenario is that China has now become a gigantic “Potemkin Village”, a Ponzi scheme, a make-believe place of fake growth based mostly on unsustainable levels of debt. Just like in other Ponzi schemes, for a while everything looks great, but then it all comes crashing down.

Pessimistic picture

Here is how The Wall Street Journal sees it:

“[It is] more likely that Beijing will continue to prop up growth, steering more capital to money-losing companies, unneeded infrastructure and debt servicing, depriving the economy of productive investment and leading to the sort of protracted malaise seen in Japan in recent decades. But China is less prosperous than Japan.”

“Some state firms remain in business despite massive debt, several years of loss-making operations and a weak business model—Chinese officials have dubbed them “zombie” companies. Earlier this month, during a visit to the northern industrial city of Taiyuan, Mr. Li railed at the drag of “zombie” companies, according to a government account. He said they should be denied loans to reduce excess supply in the steel and coal industries”.

Not a flattering picture. This WSJ piece talks about money-losing state owned companies, costly but unneeded infrastructure, zombie companies, increasing levels of debt, and a lot more. This is nasty stuff. But is this just a crazy exaggeration? Maybe.

Unreliable data 

However, the fact is that the dark scenarios and the extra worry about China are due in large part to an opaque system that produces dubious, and mostly self-serving information. We simply do not have all the facts. Therefore, it is much harder to understand what’s really going on.

And here is at least one key root problem about China. In large part we do not know what’s really going on because we cannot trust official Chinese economic statistics.

It is an almost universally acknowledged fact that Beijing releases only optimistic, doctored economic data. In other words, “they cook the books”. Their data on GDP growth, productivity, unemployment is fake.

Big lies? 

What we do not know is how deep these lies go. Are they doing just a little “air brushing”, some minor embellishments? Or are we talking about massive data fraud? We simply do now know.

And precisely because we do not have a vetted, reliable baseline regarding GDP growth, inflation, unemployment, productivity, manufacturing growth and more, when something really strange and unusual occurs, like the sudden and deep Shanghai Stock Market losses, some are inclined to think the worst.

No transparency 

Well, is China’s government going to become transparent any time soon? Don’t count on it. Don’t count on a privileged Communist Party oligarchy that owes its unchallenged supremacy to its reputation of infallibility to show poor data revealing that the leadership is delivering below plan these days. They will never do this.

Given all this, we are left with a lot of questions. We know that China is slowing down, but we do not know how much. We know that there is a lot of bad debt, but we do not know at what point this becomes truly toxic. We know that most State Owned Enterprises, SOEs, do not perform well. However, we do not know whether this is a manageable problem or a crisis. We know about huge environmental problems caused by past unchecked growth, but we do not know at what point grass-roots protests about severe pollution may morph into organized political opposition.

Not a market economy 

One thing we do know. Despite all the incredible changes, and despite its ability to lift hundreds of millions out of poverty, China has not completed its transition to market economy status.

In a real market economy it is assumed that the government publishes accurate economic data in a timely fashion. It is also assumed that the private sector leads development, while all publicly traded companies publish balance sheets audited by third parties with reputable credentials. Finally, it is assumed that independent media freely report on economic issues.

None of this exists in China. I repeat: “none of this”. 

All Is Well In China?

WASHINGTON – A detailed report prepared by a major Western international economic consultancy pointed out that the doomsday predictions about the Chinese economy about to fall apart are truly exaggerated.

All is well

The analysis maintains that China may be experiencing some problems now, but it is nothing out of the ordinary. The author points out that it is not true that the Chinese economy is dragged down by a bloated public sector. On the contrary, private enterprise is dominant and the long term trend indicates that it will continue to get bigger. (No mention that the state controls all the key strategic sectors, like energy and banking).

Plenty of innovation 

It is also untrue that the Chinese cannot innovate. There are plenty of examples of successful innovators. So much so that many western companies want to partner with them.

And it is also not true that rapid industrialization destroyed the environment. China went through phases quite similar to those experienced by other fast growing economies. Yes, there has been some environmental damage. But it is not catastrophic.

Besides, the government is acting fast, and remedial action is underway. (No mention about the lack of publicly available, reliable data on pollution. No mention that until a few years ago the government released false data on air pollution with the clear objective of hiding the extent of toxic emission in large urban areas).

Debt is manageable

It is also untrue that the massive amount of debt created to counter the effects of the 2008 global financial crisis has undermined the foundations of the Chinese economy. Yes, the author concedes, there is a lot of bad debt. However, China has massive cash reserves. The government can intervene and fix all the financial problems.

There are some issues, but no crisis 

Anyway, you get the picture. Yes, there are issues. But, hey, every country has got issues. And China’s shortcomings are pretty much the same as those experienced by Taiwan or South Korea at comparable times during their successful economic development.

Alright. So, here we have an optimist. Yes, China’s economy is slowing down. But, in truth, the glass is half full, and not half empty.

Fair enough. When dealing with such a large country it is not easy to get it absolutely right. May be the author is closer to the truth than other, more pessimistic observers.

No mention about the political and institutional context 

However, reading this rather upbeat China analysis you are bound to notice something really important. At no point is there is any mention of China as a non democratic one party state in which any political dissent is actively repressed.

No mention about routine media and internet censorship. No mention about a judiciary system that operates according to political instructions. No mention about a massive anti-corruption campaign orchestrated in secrecy, according to secret rules, by the Chinese Communist Party leadership. No mention that this fight against corruption, in a country where corruption is endemic, can be used as a tool to destroy political enemies.

In other words, there is not even the slightest mention about the fact that lack of political freedom, political pluralism and individual freedoms may have an impact on current and future economic performance. This is not just a small detail.

This connection between political freedom, economic freedom and eventually good economic performance is at the core of what we believe to be the underpinnings of modern, self-renewing societies. Free societies allow the free expression of human talent. And this talent is at the source of innovation, and ultimately prosperity.

Democracy and Capitalism 

Indeed, we say in the West that political freedom is the oxygen that allows private enterprise to exist, flourish and unleash a virtuous cycle of growth. It is not an accident that we call our system “Democratic Capitalism”.

We passionately argue that innovation is predicated upon the freedom to search, to pursue unorthodox paths, to go out of the box, to seek new partners, and so on. Hard to do this consistently in a top-down society in which few dare to go against the rules, written or unwritten as they may be.

Illiberal China will thrive 

It would appear that this China expert does not think that political freedoms have any connection whatsoever with the quality and long term sustainability of economic performance. In other words, a one party state can deliver prosperity just as much as a democracy in which basic individual and economic freedoms are constitutionally protected.

Although this point is not openly made in his analysis, implicitly we are to understand that China, a one party state, is doing quite well and –going forward– there are no major issues or minefields its self-appointed leaders will have to deal with. This means that you can have censorship and innovation. Political prisoners and social media. Non transparent judicial proceedings and intellectual property protection. No problem.

It never happened

In the final analysis, we are told that the Chinese economy, while not booming anymore, is basically fine; and all looks good. Which is to say that one party rule can create the necessary conditions for sustained prosperity.

Again, the author does not openly say this. But by implication this is precisely what we get. The numbers (according to him) look good, and so the system must be good. I find this scary.

The fact is that in the modern era we do not have other examples of one party states that produce self-sustaining innovative economies.

But this simple fact does not seem to bother the author. Again, I find this scary.



Who Believes China’s Official Economic Statistics?

WASHINGTON – We all know that China’s economy is slowing down. The Chinese government itself announced this. What we do not know, however, is how significant the slow down is, and what exactly is causing it. Is this a small issue, or is it a big, systemic problem just beginning to manifest itself? Who knows really. And much of this uncertainty is due to the fact that we cannot rely on the information released by Beijing about China’s economic performance.

A little slow down 

Chinese officials calmly admit that GDP growth at 6.9% is a little less than the 7% they expected. And they have recently hinted that probably next year growth will be a bit lower. May be 6.5%. Premier Li Keqiang said this much during a recent visit to Seoul.

What we are told is that this gentle slow down is part of a general reconfiguration of the Chinese economy. Under the expert guidance of the Communist Party, China will gradually move away from its traditional reliance on large-scale investments and exports, while more consumer spending will be encouraged. At the same time there will be more innovation, more green initiatives and improved sustainability.

The message from Beijing is simple and reassuring. All is well in China. May be a few adjustments will be needed. But all is going well, and according to plan.

Not true 

Yes, except that most likely none of this is true. According to some Western analysts, China is on the verge of a major collapse. They have created a gigantic, debt-funded bubble that is about to burst. There is monstrous over capacity in every major industrial sector linked to construction. There are tens of thousands of empty buildings. Several state-owned corporations are losing money; but they keep going thanks to easy financing coming from state-owned banks. Is this an exaggeration? May be.


Still, as a minimum, the optimistic official GDP numbers collide with other official Chinese figures related to electricity consumption, (down), cement production, (down), and steel production, (down). Hard to believe that China manages to keep the same rate of GDP growth when key indicators that should move up along with GDP are instead going in the opposite direction.

And there is more. The Singapore economy, a good proxy for what is going in China, is down, significantly. Recent export data from South Korea show a huge drop. Simply stated, China is buying a lot less from a key supplier. Not an indication of a growing Chinese economy.

Well, what is the point of all this? There are two points, actually. The first one is that the deterioration of the Chinese economy is most likely a lot more severe than anything that has been officially admitted.

False data routinely released 

But the second point is probably even more significant. China clearly releases false economic statistics, and it has been doing this routinely, for who knows how long.

Now, this is no detail. This is not akin to the White House Press Secretary trying to paint today’s events in a favorable light that will make the US President look good. We call this spin. Not laudable, perhaps unethical, but not utter fraud.

However, what China does is akin to the White House Press Secretary announcing from his podium that the US economy grew at a rate of 2.5% when it grew instead by only 1.5%. He goes out there, speaking to the nation, and he knows he is lying. There is a distinction between spin and falsehood.

And yet we accept that China does this.


This situation is unprecedented. After 30 years of impressive growth, China wants to be treated as a mature world power and a major economic player, now fully integrated in the world economy. This is not a country akin to the old Soviet Union that lived in its own universe. And this is not Mao’s China either, a country run into the ground by its leader’s bizarre ideology. And yet the government of this modernized and vastly more productive China lies about fundamental economic data. And how do we react to this?

Well, we do essentially nothing.

Look, I realize that this is an awkward situation, and that there is no easy solution. How do you say this? Well, for the moment we do not say it. Indeed, as far as I know, no Western Government is on record stating that the Chinese release false or at least not fully reliable data. Ditto for the IMF or the World Bank.

Business media reporting on China

And what about Western business media? Well, they are becoming a little more assertive about producing the evidence and the work of private forecasters and analysts that contradicts official Chinese data. Almost all China watchers agree that China overstates its growth figures. The disagreement is on the degree of the lie. Some argue that real GDP growth is 6% and not 7%. Other claim that it is even lower, may be 5% or even 4%.

But the media are careful in how they phrase all this. They know that this is potentially an explosive issue. Think of the consequences. Does The Wall Street Journal want to see its Beijing bureau closed down, and its correspondents expelled from China, guilty of producing slanderous stories about China? Probably not. Hence extreme caution when reporting on any analysis of Chinese official data.

A major economic player? 

That said, all this is absurd.  The fact is that no one believes the official data. But it is not polite to say this openly. Talk about the Emperor having no clothes.

So, here is the thing. China wants to be treated with respect. And yet it behaves just like the old Soviet Union when it comes to releasing false data and distorted information. All this smells just like the old-fashioned Communist propaganda. And what do we do about this? Essentially nothing. We listen to the releases, and we politely nod.

Sure enough, in private government leaders and financial analysts make calculations based on what they believe is really going on in China, or at least I hope this is what they do.

But in the meantime most mainstream media keep publishing or airing the false data released by Beijing, in most cases without any cautionary note about the reliability of these figures.


As the terrible crash of 2008 revealed, here in America we got into major trouble because people chose to overlook alarming signs. And this happened in a country with a lively free press and hundreds of capable analysts, not to mention laws that require detailed disclosures and full transparency.

The idea that we can deal with China as a regular business partner when we have no clear understanding as to what is really going on in this vast economy simply because we cannot trust official data is totally preposterous.

Basic rules apply to all, China included

At some point the Chinese need to be told that rule number one for those aspiring to be at the head table in the global economy is full transparency and publishing accurate information.

Somehow the Chinese believe that they have become so big and so important that basic rules do not apply to them.

They should be told otherwise.




WSJ: Chinese Economy Not Fixed

WASHINGTON – “Chinese factories continue to pump out too much steel, glass, cement and other items even as they battle mounting debt, slumping prices and weak demand. Factories in the world’s largest manufacturing nation have suffered 43 consecutive months of deflation. And loan demand among manufacturers in the third quarter turned negative for the first time since a central bank index started in 2004”.

–The Wall Street Journal, October 31, 2015

Commodities Exporting Countries in Deep Crisis

JOHANNESBURG (South Africa) – Renowned oil expert Daniel Yergin recently observed that the collapse of crude oil prices is just the last act of the commodities ongoing tragedy. Commodity prices exploded in recent years mostly because of historically unprecedented demand from China. But China’s boom is over. And commodity prices are essentially in a free fall, due to lack of demand.

The consequences of this collapse 

Yergin noted that this collapse is bound do have serious economic and political consequences in countries such as Brazil that for a long moment believed that they had become really rich by selling to China. Now the leaders, and the mining conglomerates that operate in their countries, know that it was only a dream. Except that many of them (very unwisely) borrowed a lot during the go-go years, using that dream as collateral.

How bad is it?

Well, how bad is it? Bad enough. According to a BBC report, copper dropped another 2% in recent days. It is now “at its lowest level in six and a half years”. 

Indeed, copper is now at $ 4,995 a ton. We are back to the depressed levels copper reached in 2009, when the world was right in the middle of the Great Recession. And here is the rest of the BBC report:

“Demand for copper, which is used across industry from construction to car manufacturing, has suffered from the slowing Chinese economy. 

Investment bank Goldman Sachs warned investors this week that prices would continue to fall. In a note entitled, “Copper’s bear cycle still has years to run”, its analysts predicted copper prices would probably drop to $4,800 a tonne by the end of December and to $4,500 by the end of next year. The decline in copper is only a part of a global meltdown in commodity prices caused by China’s economic downturn. 

Crude oil has fallen some 60% from June last year, thermal coal has been on a long 60% slide since 2011, and iron ore is down even more, close to 70% since 2010. 

The effects are rippling out into other sectors. On Tuesday, Japanese shipping business Daiichi Chuo Kisen Kaisha filed for protection from creditors, caused by the collapse in Chinese demand for iron ore and coal.

Unsurprisingly the collapse sent a shiver through the rest of the Japanese shipping sector. Nippon Yusen, Mitsui OSK Lines, Kawasaki Kisen Kaisha saw their shares fall between 4% and 8%.

And the effects spread far wider than the mining companies and their support services. Any economy dependent on commodity exports is seeing its currency punished. Australia, whose iron ore, coal, oil and natural gas fueled the Chinese boom, has seen its dollar lose more than a quarter of its value against the US dollar over the past year. [Bold added]

Chile, where copper makes up 30% of the value of its exports, is expected to announce on Tuesday that public spending, having grown almost 10% last year, will rise by half that amount this year. Economic growth there has slowed along with the fall in the copper price and a decline in investment in the mining sector.”

China’s binge

So, here is the thing. China engaged in the construction equivalent of a historic drinking binge. Its leader really thought that they could counter the 2008 Recession through gigantic debt-driven investments in “everything”: shopping malls, luxury condos, high-speed rail, ports and airports. In pursuing this construction extravaganza, the Chinese generated an unprecedented wave of commodities imports.

But now the enormous debt created to finance all of this construction is catching up with China. The boom is over. And the commodities sellers now know tow things. Number one, going forward China’s buying will be modest –at best. Number two, they will have to deal with the massive debt that they contracted in order to finance the growth of their sectors, so that they could meet China’s appetites.

Massive malinvestment

Well, China’s growth was driven by malinvestment. Sadly, it turned out that malinvestment was contagious. Everybody invested in additional capacity hoping that China’s absurd levels of demand for iron ore, copper and what not would continue essentially for ever.

South Africa will suffer, along with Australia, Brazil, Chile, Zambia, and many other commodities exporters. Add to this troubling picture the well publicized afflictions of all oil exporting countries, and then you cannot be surprised when reading that the IMF just revised down its global economic growth projections.

Still, please note that, if there are going to be negative economic repercussions in Germany because of the global slow down, in Brazil and elsewhere it is going to be a lot worse. Brazil and most of the other commodities exporters do not have a “Plan B”.


A Made In China Global Recession?

WASHINGTON – After the disastrous 2008 global financial crisis triggered by crazy speculation in the US, the world has enjoyed several years of steady, if modest, growth. However, If history is any guidance, we are due to have another recession in the near future.

China’s recession

But this time it will not be engineered in the West. According to Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management, and the author of “Breakout Nations: In Pursuit of the Next Economic Miracles” (Norton, 2012), the next crisis will come from China. In a well crafted op-ed piece Sharma explains why. (A Global Recession May Be Brewing in China, The Wall Street Journal, August 17, 2015)

Abnormal growth 

The fact is that China’s growth since the 2008 crisis has been abnormal. It has been fueled by enormous amounts of debt, all of it accumulated at unprecedented speed in just a few years. As Sharma put it:

“The problem is that China’s economic rise of late has been facilitated by a massive and unsustainable stimulus campaign. No emerging nation in recorded history has ever tacked on debt at such a furious pace as China has since 2008, and a rapid increase in debt is the single most reliable predictor of economic slowdowns and financial crisis. China’s debt as a share of its economy increased by 80 percentage points between 2008 and 2013 and currently stands at around 300%, with no sign of abating.  [Bold added]. Beijing policy makers have been trying to sustain an unrealistic and randomly selected growth target of 7% by steering cheap loans into one bubble after another—first housing, most recently the stock market—only to see each bubble collapse”.

No easy fix 

And there are no easy ways to fix this problem. The recent currency devaluation may help Chinese exporters. But most experts agree that this move looks like yet another attempt to “do something” to support the economy, as opposed to a component of a well crafted strategy.

China’s slow down (Sharma estimates that real GDP growth is about 5%, much lower than the official 7% figure), dragged down all the commodities exporters (including Australia, Brazil and South Africa) which benefited greatly from China’s incredible, debt-funded, infrastructure and construction boom. These countries are now doing poorly, in large part because they have lost their main revenue source.

America is limping along, with 2% growth. Europe is lucky to be in positive territory. Still, many of Germany’s exporters are hurt by China’s slowdown because this means fewer exports.

The next recession 

According to Sharma, the outlook for the global economy is not very good. And a further decline in China may trigger another recession.

“This quarter there is little evidence to suggest that the global economy is breaking out of its first-half rut, with growth still stuck in the 2%-2.5% corridor –continues Sharma. “This means that the world is one shock away from recession. A debt-laden China is now the critical link, and another one or two-percentage point decline in its growth rate could provide that shock. The currency devaluation last week, coming after a string of increasingly desperate and ineffective stimulus measures, added to the sense that the critical link is weak indeed”. 

Cautionary tale

Well, Sharma’s prediction may or may not be accurate. But here is the cautionary tale.

Until not too long ago, half the world, including leading Western pundits, extolled the well-crafted and disciplined Chinese investment-driven model. Some argued that may be the smart Chinese technocrats (a blend of re-engineered socialists spiced with updated Confucianism) had really “invented” a new economic model. They had created a new formula that could deliver 10% growth for ever.

Well, it is not so; not by a long shot.

Mostly cheap labor 

China did extremely well by managing with skill unique (and almost by definition temporary) advantages. They had tens of millions of newly minted factory workers willing to toil, (for long hours and almost no benefits), for wages that were a fraction of their Western counterparts’.

This inherent labor cost advantage created a massive shift of manufacturing activities to China. But cheap labor is far less significant today. Chinese wages have been going up, while automation is diminishing the relevance of labor costs.

Construction boom

Anyway, having exhausted their real advantages, the Chinese leaders, in a desperate attempt to sustain their economy, created a new fantasy world of debt funded growth. They built everything, everywhere, on a massive scale, triggering absurd levels of over production in all sectors that support the construction industry. And now the bubble has been burst.

Of course, there is another option for China. And this would consist in fostering an innovation friendly economy in which future growth would be the result of proprietary, made in China, inventions.


But innovation requires freedom. And this is why the Chinese leaders are not going to pursue that route. Therefore, with or without a China-triggered global recession, expect China to settle on a 4 to 5% developing country rate of growth.

Not so bad, after all. But hardly inspiring.