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China Unable to Release Economy Buffer

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China, the largest US Treasury bond foreign investor, currently holds $1.16 trillion in bonds. (Photo: Gary Tamin)
China, the largest US Treasury bond foreign investor, currently holds $1.16 trillion in bonds. (Photo: Gary Tamin)

ECONOMY

  • China unable to create stimulus package to buffer local, global economies
  • China's annual inflation was 6.5% in July
  • Premier Wen seeks global cooperation, responsible policies

As the US credit rating downgrade peaked yesterday, concerns are high that the US and European debt crisis might lead to a global double-dip recession.

If so, this time around China may not be in a position to carry the global economy on its shoulders the way it did when it created a stimulus package to buffer the local and international economies. China's annual inflation rate increased to 6.5% in July, while the country's industrial output is growing more slowly than expected.

Inflationary Pressure High

China's inflationary pressure has created a hard situation for the country's central bank, who has been attempting to minimize price volatility without further harming the economy. Peter Hickson, Managing Director of UBS Global Commodity Research, told Reuters that even policy responses may be impotent at the moment because the market wants to know what moves policymakers can effectively make.

Almost $8 trillion in global equity market capitalization has been eliminated since July 26. Investors are swapping their stocks for buys that are currently perceived as safe, including the Swiss franc, gold and the Japanese yen. Keith Ducker, Chief Investment Officer for Tora, said: “This is the first time in several years that all three major economic regions are feeling economic distress at the same time.”

China's Vice Premier Wang Qishan exchanged ideas on the current economic and financial situations with US Treasury Secretary Tim Geithner via telephone on August 8. China, the largest US Treasury bond foreign investor, currently holds $1.16 trillion in bonds.

An anonymous central bank advisor told Market New International that China must continue to purchase of US Treasury bonds, despite the downgrade. A group of unidentified economists from the same report warn that the S&P downgrade might accelerate China's desire to cut long-term US bond holdings.

In reference to the debt situations in the US and Europe, Premier Wen called for “relevant” nations to carry out responsible monetary policies and alleviate fiscal debts.

Chinese Premier Calls for Global Cooperation

After a meeting with the State Council, China's Premier Wen Jiabao called on global cooperation to stabilize the financial markets. Wen asserted, in his first public comment about the latest global market meltdown, that “the global community should improve the communication and coordination of their macro economic policies to realize sustainable, stable and balanced growth in the world economy.”

Suggesting that China may loosen its tough policies on fighting inflation, Wen refrained from mentioning cracking down on inflation as a top priority. The Premier referenced inflation only by stating that the government should “try its best to curb price rises,” while stating that current measures have produced positive results.

Analyst Qiao Yongyuan from CEBM claims that it is too early to determine whether China will change its monetary policy. Yongyuan believes that the current situation will likely cause Beijing to hold decisions for now. China's lower-than-expected industrial output may signal that China's slower-than-average growth might actually help ease inflationary prices.

In a move to demonstrate global cooperation and help restore investor confidence, the European Central Bank purchased Spanish and Italian debt - and G7 and G20 nations pledged to support global financial stability, but to no avail.

The news that quelled market fears came from across the Atlantic Ocean, when the Federal Reserve stated on August 8 that it would maintain a record-low interest rate until mid 2013.

On August 9, the Dow Jones industrial average rose to about 430 points, exceeding 500 points in the last hour. After a highly volatile day in global market trading, investors observed a boost in Wall Street confidence.

Key Statistics – Global Markets (source: Reuters)

  • The USD, which has fallen to an all-time low, is currently near par with the Swiss franc exchange rate of 0.75.
  • As a result of the recent economic chaos, the price of gold has scaled above $1,770 an ounce.
  • S&P futures have returned to positive after falling more than 3%.
  • MSCI's Asia Pacific shares, excluding Japan, dropped 1.9% while the Nikkei fell 1.7%.
  • On August 9, global stocks reached an 11-month low.

By Nicole Manuel for
Nicole Manuel is a freelance economics, finance and blog writer with a degree in economics and over two years of experience.

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