Worried About Turkey’s Economic Problems? China’s Could Be Worse

New York Times ^ | 08/15/2018 | By Ruchir Sharma

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Falling back on a standard excuse of besieged strongmen, President Recep Tayyip Erdogan of Turkey is blaming traitors and outside powers for his nation’s financial crisis, and describing the strong United States dollar as among “the bullets, cannonballs and missiles” foreigners are using to wage “economic war” on his country.

Many emerging markets make themselves vulnerable to financial crisis by spending more than they can afford, and relying on foreign lenders to fund these profligate habits, but Turkey was an extreme case even before Mr. Erdogan took power in 2002. Of late, his reckless economic policies — including setting interest rates at artificially low levels, and driving up debts, deficits and inflation — have only made matters worse. Many wealthy Turks saw another crisis coming and were fleeing the country well before foreigners joined the recent rush, accelerating the fall of the Turkish lira over the past few days.

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But there is an even bigger question looming: The strong dollar that is weakening Turkey’s economy may also be undermining the world’s second-largest economy, China.

China is vulnerable to the strong dollar for different reasons. At one level, China is far less dependent on imports than Turkey, which has to buy virtually all its raw materials, including oil from abroad. Unlike Turkey, China does not run a chronic trade deficit and does not have to borrow heavily in dollars to finance its purchases abroad.

In the wake of the global financial crisis of 2008, however, Beijing tried to keep its economy humming by ordering state banks to pump out new loans. More than half the increase in global debt over the past decade was issued as domestic loans inside China.

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China also faces a serious risk of capital flight. The last bout began in 2015, amid early indications that the Federal Reserve was going to start raising interest rates. China stopped that exodus by tightening its currency controls, but controls rarely work for long. Savvy locals find creative ways to get their money out.

This year, the Fed’s tightening has further strengthened the dollar, while Beijing’s easy money policies have further weakened the renminbi — increasing the incentive for Chinese investors to dump China’s currency for dollars. Right now Chinese can earn the same interest rates in the United States for a lot less risk, so the motivation to flee is high, and will grow more intense as the Fed raises rates further.

[proxy_user]

The whole thing is a house of cards.

Have you read this:

https://wolfstreet.com/2018/08/14/alibabas-20-f-annual-report-financial-comedy-gold/

[RayChuang88]

I've warned for YEARS that the cost of feeding, clothing and sheltering 20% of the world's human population is going to catch up to them. Especially with the huge air and water pollution problems in that country.