Page 4 - MEX Express - Vol 6 Issue 2

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Retarding Chinese Economy & its Global Implications!
“China’s economy is slowing down” a topic
which is most discussed nowadays within the
global financial circles. For those who were jealous
of the rapid development of China since 1980,
their domination in world trade and rising of a
communist country next to U.S., this news brought
cheers. Discussion revolves mainly around the
implication of contraction of the world’s second
largest economy on the global economy. But as in
any discussion, there are people who say that this
slowing will badly affect the world economy and
those optimists who see this as an opportunity
to be benefitted from. Recent negative economic
data out from China combined with country’s first
bond default bring back concerns about the state
of Chinese economy and the risk of credit bubble
that looms in the market. One thing is sure if this
reduction in pace is a reality; it will send its shock
tremors around the globe.
China government, after overseeing the
fastest growing economy in human history, is now
preparing itself to manage this inevitable event.
But the reforms whatever they have introduced till
now are yet to deliver. International Monetary Fund
recently revised down the growth prospects of the
China that too without a bounce back, assert this
slow down. As Chinese economic model is lying
mainly over the heavy investments in infrastructure
building, production sector and exports, a credit
collapse, resource wastage and faltering global
partnerships will have a monumental long term
effect. As in the current scenario, China plays very
significant role in the shaping of many economies,
hence its recent borrowing policies, slowing
consumer demand and increasing unemployment
rate will expose those countries to vulnerability.
Post 2008-Crisis
China’s GDP growth was extraordinarily high
touching 15 percent before the 2008 crisis level but
U.S Federal Reserve under the Leadership of Janet L. Yellen
“It depends what the circumstances are.”
- Janet Yellen on Aug 13, 2014 done. In her career, Yellen has written many papers
The new chairman of Federal Reserve, Janet
Yellen served as the Vice Chairperson of the
Federal Reserve Board for four years until she was
appointed as the first Female chairperson of the
Federal Reserve Board of Governors in 2014.
Janet Yellen Life:
Born in August 13, 1946 A.D in Brooklyn, New
York, Janet Louise Yellen graduated from Brown
University in 1967. While in 1971, she pursued
her Ph.D. from Yale University. After a teaching
profession in Harvard University, she served the
Federal Reserve from 1977 to 1978. Then she went
to University of California to be a professor. Filled
with perseverance, Yellen worked on the White
House Council of Economic Advisers from 1997
to 1999. Her career took a further boost when she
was appointed the president and CEO of the Federal
Reserve Bank of San Francisco. Then her path in
Federal Reserve Board of Governors started from
2010 as a Vice President. Finally in 2014, President
Barack Obama appointed her as the Chairperson of
the Federal Reserve.
She played many roles in the Federal Reserve,
becoming a leading figure in U.S monetary policy.
She held the determination to get things done
especially to reduce unemployment even if it cost a
bit higher inflation to achieve it. She outstood with
her willingness more than the other economists.
This is the very first time in the history of
the Federal Reserve that a woman chairperson is
appointed. She is also the first Democrat to hold
the post in almost three decades. Even the president
Obama himself admired her good judgment and
Editorial Board: Mr. Chittaranjan Pandey / Mrs. Liberty Shakya / Mr. Lakshman Pandit / Ms. Shubhechchha Mulepati
Mercantile Exchange Nepal Limited, Alliance Tower, 4th Floor, Charkhal, Dillibazaar, Kathmandu, Nepal
Phone: +977-1-4011542/43/44, Fax: +977-1-4011545/6 | e-mail: editor@mexnepal.com
MARKET PERSPECTIVE
in the last quarter it showed only around 7.5 percent
growth.
In order to tackle contingencies in net exports
resulted from the 2008 crisis; Chinese government
immediately came with a monetary stimulus. This
actually changed to a lending boom which developed
aggressively to an investment boom. Because of
these measures, China somehow manages to slip
from the claws of 2008 crisis. But now the export
sector is really showing signs of bleeding with a
rate of 3.1 percent year on year in June. By shadow
banking, lending to high risk borrowers, total credit
in the Chinese economy is now 200 percent points
to GDP.
Global Implications
Last five years, China accounts for half of
worldwide growth. So any decline in the pace
of biggest consumer of raw materials, will also
decelerates the pace of other countries’ economies.
Thus all who are exporting and importing to and
from china will be swept away by tsunami raised
by the plunging of Chinese economy. Over the past
decade, majority of copper, iron ore and steel was
consumed by China thus driving prices of these
commodities to record highs. Thus with a low
demand, the first set of economies that will get
affected are those countries who are supplying these
commodities to China.
China, making 10 percent of its GDP, is the
biggest trading partner of Australia, a commodity
rich country. As 10 percent of nation’s job market
and 20 percent of national output is in the resource
industry, less thirsty china will force them to unleash
contingency plans to keeps their economy floating
for next decade. China is also the largest trading
partner of South Africa. Diamonds, platinum, gold,
coal and iron ore which together account for 41
percent of South Africa’s yearly exports to China.
expressed his confidence in her ability to get things
and publications, some even co-authored by her
husband, a Noble Prize winning economist and
UC Berkeley professor George Akerlof. For her
contribution in the field of economics she has also
received many honors.
Federal Reserve
The Fed is composed of the Board of Governors
appointed by the president, the
Federal Open Market Committee
(FOMC), twelve major regional
Fed banks, many private U.S
member banks and various
advisory councils. The committee
of FOMC is responsible for
developing monetary policy.
Under the rule of U.S congress, the
three key objectives for monetary
policy in the Federal Reserve
Act are improving job market,
stable prices and moderate long
term interest rates. With years,
the duties of Fed is increasing,
that includes, implementing the
nation’s monetary policy, regulating and supervising
financial institutions, maintaining stability in the
financial system and making financial services
available to depository institutions, the U.S
government and other foreign official institutions.
Janet L. Yellen as a Federal Reserve Chairperson:
Janet L. Yellen is strong footed in her path;
her main focus is in the course of reducing
unemployment. After narrowing down of U.S
economy in the first quarter, Yellen led Fed’s rate
Another major economy group that will feel the
heat of this slowdown is ASEAN, with whom the
china’s trade has grown 30 fold in the last 15 years.
Indonesia with their commodities and Thailand
with their rubber and computer parts will be most
affected. China is taking quarter of the total overseas that had been exported from the U.S., as it only
exports from South Korea, so any direction to cut
these will tamper the country’s economy. According
to experts, if Chinese economy slips in this way, a
commodity glut will be created thereby forcing a
30 to 40 percent decline in the price of base metals
and 30 percent decline in the prices of Brent crude.
But many commodity importing countries such as
Philippines, India and Turkey are eagerly waiting
and started planning to take advantage of this price
fall.
Euro zone will also feel the tremble of the shock
waves generated by this slow down. Exports to china
are rapidly on its downtrend in Germany. Many
companies from various industries like car making,
electronics and software cut their yearly forecast for
china following this downtrend. Being the biggest
economy in the Euro zone, contraction of German
setting committee stuck in a single course. After
which the U.S economy has rebound recently. Ms.
Yellen knows how to put her views into practice.
For decades, the main concern of the monetary
policy was to control Inflation and detect signs of
recessions by adjusting the short term interest rate.
But now, the major challenge for the monetary
policy is futile growth. Janet Yellen has the
responsibility to navigate and instigate financial
markets in order to convince that the Fed knows
what it is doing since, Federal Reserve has to rely
on controversial and less tested tools, such as
bond buying. Fed Chairperson Janet L. Yellen has
pulled the strings of unconventional policies, from
bond buying to ‘forward guidance’ even when
she served as a vice chairperson of the Fed. Her
approach follows the footstep much like Mr. Ben
Bernanke the predecessor Chairman of Fed which
is technocratic and thorough command of the data.
Her approach is rather a safe approach that might
help to reduce further the market volatility.
Volume: 6 • Issue: 2 • Year: 2014 A.D
economy will surely affect the Euro zone’s effort to
aground to a pre 2008 crisis level. Until and unless
there is a major crash landing, U.S. economy will be
left out with slight scratches. Even this slowdown
bring down the demand of sophisticated materials
amounts to a decline of $6 billion, it may not affect
a large economy like U.S.
According to analysts, two reasons can trigger
this crash landing. One is the tumbling of exports
and loss of migrant worker job and other may be
insufficient funding from government. Either way an
overinflated credit bubble which can burst anytime
is hanging over Chinese economy and thereby over
world economy like a “Damocles Sword”.
" Nijesh Ramraj
Yellen, who also runs the Federal Open Market
Committee, is working on to rejuvenate the U.S
economy without having to trigger the inflation and
asset bubbles. She strives to achieve the sustained
growth with easier credit, employment opportunities,
elevating stock prices, improving global economy
and Fed’s prepared monetary policies. Where the
inflation is concerned, it is below the Fed target
and increase in the level sometimes does not put
threat to the set level is what she considers. Rather
she would prefer the increase in
wage inflation which has chances
of increasing the consumer
expenditure. With increase in
labour pay, the economy has
better prospect of growing. This
concept of her has influenced the
Fed towards a new direction of
stringent labour market.
The approach of current Fed
Chairperson is really seemed
to be working. U.S economy is
gradually progressing and the U.S
currency is strengthening against
other currencies like Euro, INR,
Yen, and Won etc. Until the Fed
Chairperson’s view on Labour market remains the
same, we can only presume where the market will
make a move.
Sarmin Rauf
Bachelors in Business Administration
Banking & Insurance
Pokhara University
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