<div><em>There was a time when the world caught the flu if the US economy sneezed. That role has now been usurped by China, given that it accounted for 38 per cent of global growth last year, writes <strong>Rahul Sharma</strong></em><br><br><br>As prophecies go, this one seems to be coming true much before the world hoped it would.</div><div> </div><div>Last month Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management who manages more than $25 billion, predicted that the while all global economic recessions in the past five decades were triggered by a slowing of the US economy, the next one will be made in China just like most of the things in the world are today.</div><div> </div><div><table align="right" border="1" cellpadding="2" cellspacing="2" style="width: 300px"><tbody><tr><td><img alt="" src="http://bw-image.s3.amazonaws.com/rahul-300.jpg" style="width: 300px; height: 271px;"></td></tr><tr><td><strong>Rahul Sharma</strong></td></tr></tbody></table>He was expecting the crisis to arrive over the next couple of years, but it seems to have already made a vicious landfall on the global economic shores if the mayhem in world stock markets ignited by a slowing Chinese economy and a collapse in its equities is any indication.</div><div> </div><div>Worse, it could stay around for a while, making it extremely difficult for a country like India – which its finance minister and the central bank governor see as better placed than most other developing economies – to balance its fiscal policies to sustain much-needed economic growth in the face of sputtering financial markets and the currency.</div><div> </div><div>China has been the elephant in the room since Lehman Brothers folded up, triggering the last wave of global economic turmoil. It stood out as the biggest contributor to global growth in the past eight years. But now the bubble, long expected to burst due to a mammoth build up of debt, is popping the wrong way.</div><div> </div><div>China’s slowdown has been well articulated in recent months. The economic numbers have mostly been fudgy, and nobody really believes any longer that its GDP is growing at 7 per cent. The difficult part is that as the world’s second biggest economy, biggest manufacturer, largest importer of key commodities, and the biggest growth driver, China today holds a much more influential position in the world than it ever did.</div><div> </div><div>There was a time when the world caught the flu if the US economy sneezed. That role has now been usurped by China, given that it accounted for 38 per cent of global growth last year.</div><div> </div><div>And that is only partly scary. The other part of the story is that investors are beginning to lose confidence in the Chinese government’s ability to control and direct its economy. For long everybody believed that the government in a single party system had the ability to prop up the economy through cash infusion at opportune moments.</div><div> </div><div>That happened in the immediate aftermath of the Lehman Brothers debacle in 2008 when the Chinese government opened its monetary tap, pumping in billions of yuans into the economy to keep it stable. However, that meant debt parameters were breached. The headwinds today are largely because of that ill, which built up in the economy silently, but surely.</div><div> </div><div><strong>The result: </strong>while investors and economists hoped for a soft landing, they heard a huge thud. Yesterday, everything in global financial markets was down as equities went into a free fall and currencies slumped, pushing oil prices to 7-year lows. Wall Street crashed by 1,000 points before recovering. As panic hit the markets, and it usually happens at such times, the global selloff wiped out a staggering $490 billion from emerging markets equity. The only bright spark was gold, which rose, as it reasserted its position as a safe haven.</div><div> </div><div>India was not any better off. The rupee breached the 66 to a dollar mark and the stock market dropped by 1,700 points, wiping off a humungous 7 lakh crore rupees in investor wealth and forcing Finance Minister Arun Jaitley and Reserve Bank Governor Raghuram Rajan to tell investors to not fear the global glitch.</div><div> </div><div>Jaitley called the phenomenon ”transient” and Rajan assured the markets that the central bank had enough resources at $380 billion in foreign exchange to manage a volatile rupee. The next few days will show how close or far they are from the truth.</div><div> </div><div>Meanwhile, the Chinese story seems to have lost much of its sheen. No one is talking of a shift away from a U.S. or Europe-led world to one led by China. And while Beijing has the might to intervene, thanks to its colossus $3.9 trillion reserves and interest rates that are much higher than in developed economies, its hands are tied. Battling between slower growth and high debt, President Xi Jinping has to find a way to arrest the slide in confidence and still retain his power at a time when his fight against corruption is turning friends into foes.</div><div> </div><div>Xi needs to tell the world that what was heard was merely a sneeze, not the announcement of the arrival of a long-term disease that will further distress the global economy. He also needs to ensure his power is not diminished in the aftermath of a rout that has hit China’s image of a global power hard.</div><div> </div><div>(The columnist is a former newspaper editor. Currently President of Mumbai-based Rediffusion Communications, he also runs www.lookingbeyondborders.com, a foreign policy and global economy blog. Views are personal)</div><div> </div><div> </div>
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