The Chief Adviser to the Head of the Analytical Center Leonid Grigoriev talked about the impact of the Chinese problems and oil prices on the global economy in an interview for the banki.ru portal.
Impact of Oil Prices on the Global Economy is Quite Mixed
— Can we say that the world is on the brink of a new global financial crisis or a new crisis has already begun?
The situation we have in the global economy today could best be described as an incomplete recovery from the 2009 crisis. Even though the US economy is growing, the EU is in stagnation and in Brazil there is a downturn. What is happening in China now is a classic financial bubble. But it does not mean the start of a new global financial crisis. Sure, China’s economic woes are going to affect the global economy. But there is a big difference between consequences of problems in financial markets and a full-blown crisis. I do not expect the financial turbulence we are seeing in China today to lead to any serious problems. Even though these problems are very unpleasant, especially for the US. It goes without saying that problems in financial markets can slow down the global economy. But, historically, the global economy has had twice as many financial crises as it has economic crises, so when stock indexes are tumbling it is not necessarily the start of an economic crisis.
— Which of the problems that caused the 2008-2009 crisis remain unresolved today?
‘Of the problems that hit us in 2009, credit crunch or shortage of borrowed funds in the market still remains very much in evidence. The situation we have now is that money is cheap but it is all concentrated in banks because bankers do not know who they can loan it to while market players do not know what they could spend loans on. In addition, the tightening of the monetary policy after the extension of Basel III has also had an impact.
— What are the causes behind what we are now seeing happening in the Chinese economy?
What’s happened in China is that shares issued primarily by state-owned companies have plummeted. A lot of foreign investors viewed these shares as a good investment. But these shares were very cheap from 2007 onwards and only began to gain value about a year ago. So essentially what we are seeing now is the shares that skyrocketed over the past year are now tumbling down. It should be noted that the Chinese economy has its share of problems, but the Chinese stock exchange still has a life of its own. I mean the laws stock markets follow are rather unique. There was some improvement on the Shanghai Stock Exchange after the Chinese Government decided to inject liquidity from the Hong Kong Stock Exchange. This resulted in a so called bubble, now it is burst, just like dozens of similar bubbles in many other countries did before.
The fact that the situation on the Chinese stock market has had such a major impact on US stock exchanges is actually quite surprising. It is a sign of instability on the global financial markets. And the collapse of the Chinese stock market has put global investors in a rather bizarre position. They cannot invest in Russia at the moment. Investing in Brazil is difficult, the situation in Europe is uncertain and China is now having problems too, so investors are at a loss as to where they are supposed to invest now. This situation is putting a strong downward pressure on the global economic growth, but it has to be pointed out once again that slowing economic growth does not necessarily mean a new global crisis.
— Not so long ago China devalued its yuan, Kazakhstan’s tenge soon followed suit. Is that the start of new currency wars?
Competitive currency devaluations can happen from time to time. The Chinese yuan is fairly undervalued and for a long time the thinking in the US has been that it has to be revalued, but because of that Chinese goods began to loose their competitive edge on price, as Chinese labor was no longer as cheap as in other third world countries. This latest devaluation came as quite a surprise for the financial markets. That is the story so far. We are dealing with a slump that China’s using to get an edge in its exports policy.
— Which national economy’s now having the most influence on the state of the global economy? Is it the US, the Eurozone or China?
These are three huge pillars that each support so much that it is impossible really to answer your question with certainty. If you add up these three economies, the total will be more than half of the global GDP. Everything needs to be in balance. But China’s slowing down at the moment, that’s for sure. Its GDP was growing at 10% a year then at 7.5%, now its GDP growth is down to 6% a year, but it is still a very fast growth rate by everyone else’s standards. It should be noted, however, that lately some doubts have emerged about the reliability of Chinese statistics.
— How long is this slowdown going to last for, do you think?
As the saying goes nothing is as permanent as the temporary. In the most general sense things have not been right in the global economy since 2008 and the global economy’s been having problems ever since, sometimes they are minor problems, other times they’re more serious.
— How does the state of the global economy change depending on the price of energy?
The global economy has learned to live with expensive oil. The current collapse in oil prices is extremely good news for importers. The Europe stands to gain from it a lot, the US will gain as well as China. It is oil exporters such as Russia, the OPEC and others that stand to lose big from this development. So in other words the impact of oil prices on the global economy is both good and bad.