4 factors that may drag down world economy in 2016

October 17, 2015 08:04
Shanghai's development as a financial center still faces various restrictions. Photo: Xinhua

We’ve seen several worrying signs regarding global economic growth as we enter the last quarter of 2015.

First, capital flows are changing.

Money is expected to flee from emerging economies, as the liftoff in interest rates by the US Federal Reserve is around the corner.

Many emerging countries have spent too much amid massive inflows of low-cost US dollars.

Some emerging economies are likely to suffer from an economic recession or even financial crisis within six to 12 months when these US dollars leave.

The United States may not be immune from the effects of struggling emerging markets.

It could face sliding economic growth as well as a significant drop in equities.

And things may get worse if a hard landing happens in China.

The whole world might fall into an economic panic.

For emerging markets,depreciation of the local currency and falling prices of domestic assets are the two major risks.

Some economies with good fundamentals will be able to contain these risks and roll out measures to stabilize the prices of property and stocks.

These countries will also be able to stem further capital outflow.

China is clearly one of these countries.

Second, apart from the issues in emerging economies, Europe might face an even greater risk.

The refugee issue has exposed internal problems inside Germany, and German Chancellor Angela Merkel's open-door policy is now under huge pressure with the massive influx of refugees.

Volkswagen AG’s admission that it sold diesel cars designed to fool emissions tests may have a negative impact on other German car brands, like BMW.

That would take a toll on German’s economy, as the automotive sector contributes nearly 20 percent of the economy.

The open-door policy is linked with Germany’s shortage of technical talent and workers.

Merkel may be seeking high-quality workers, like technical staff from Syria, to help mitigate her country's labor shortage.

Third, the timing of the Fed liftoff will be significant.

We’ve seen the US government adopt economic policy and financial measures to boost its own economy.

Peter Drucker, the legendary US management consultant, said a company has to deal with its social impact and assume social responsibility in order to seek growth.

It’s the same for a country, which has to handle its impact on the global community as well as shoulder its due responsibility.

Fourth, there is a risk of a further slowdown in economic growth in China.

The International Monetary Fund estimated China’s growth at 6.8 percent this year and 6.3 percent next year.

That puts in question Beijing’s promise to maintain 7 percent growth this year.

China’s stock market has settled down from a period of turmoil.

Economic restructuring is the top priority.

I believe that whether China is able to stem its economic slide largely depends on the growth momentum at the local level.

For example, many companies are considering relocating their headquarters away from Beijing because of its traffic jams and air pollution.

The capital city has yet to find a new growth engine.

Consumer and housing prices in Shanghai are too expensive for many companies.

Shanghai has relied on trade in the past, and its development as a financial center still faces various restrictions.

Guangzhou, as a relatively conservative city, has yet to form a large-scale innovation economy.

Zhujiang New Town, the country's second-largest central business district (CBD), is home to leading companies and financial institutions within the city.

By contrast, Shenzhen has the greatest potential growth momentum in the next five to 10 years.

Its special zone in Qianhai can leverage the city’s proximity to Hong Kong.

Shenzhen's residents and entrepreneurs are more open and aggressive, and they are more willing to accept new ideas.

However, many Chinese cities still depend on a property-driven growth model, which is unsustainable in the long run.

This article appeared in the Hong Kong Economic Journal on Oct. 13.

Translation by Julie Zhu

[Chinese version中文版]

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adjunct professor in the Department of Finance at HKUST Business School