Large-scale economic fluctuations have hit almost all emerging market economies. China's economic growth in the first two quarters plunged to its lowest level since 1990. And the ups and downs in the Chinese stock market, along with the yuan's depreciation against the U.S. dollar, has given rise to speculation, especially in the United States, that the Chinese economy is on the brink of collapse.
But some Western countries have a different view. German Chancellor Angela Merkel and French President Francois Hollande have said they are confident of the Chinese economy.
The fact is, despite the current challenges, China's economic fundamentals are still stronger than that of the other large economies and emerging markets, and the difficulties China faces have been exaggerated. China has a much larger space to maintain its economic growth than the other countries, including the U.S..
Taking a long-term view, one can confidently say China's business environment and competitiveness are better compared with the other major economies and emerging markets. And contrary to speculation, China has not triggered a "currency war" in spite of the depreciation of the yuan, because it has the capability to keep its currency stable.
The U.S. should accept that China is very important for the global economy, and realize that helping the Chinese economy in difficult times actually means helping the American economy.
The U.S. annual economic growth has not touched 3 percent in recent years - it was 1.6 percent in 2011, 2.3 percent in 2012, 2.2 percent in 2013 and 2.4 percent in 2014. So, if the U.S. thinks its rate of growth is "robust", how can it say China's 7 percent growth is "worrisome", let alone describe it as indicating an "economic collapse"?
The financial and monetary "weapons" that China can use to boost its economy are much more substantial than what the U.S. has in its economic arsenal. China's nearly $4-trillion foreign exchange reserves give it unparalleled options to stabilize the yuan's exchange rate. Many in the U.S. see China as the largest-potential competitor and thus wish to see China go into an economic freefall and lose control over the flight of capital. But their wish will not come true, and if it does the U.S. economy will suffer a heavy blow.
The huge size of China's economy and its financial assets will ensure the flight of capital does not deal it a fatal blow. In fact, the other major economies and their central banks will, sooner or later, have to coordinate their actions with China to protect themselves.
Large-scale flight of capital or the reversing of capital flow is the main reason behind the sharp depreciation of some emerging markets' currencies. Data show that in the 13 months before August, the overall capital outflow from the 13 largest emerging market economies was $940.2 billion, almost twice that of the $480 billion in the three quarters during the 2008-09 global financial crisis.
The flight of capital from the smaller economies is not enough to influence the U.S. dollar's exchange rate and its asset price. If the flight of capital from China is large enough to depreciate the yuan by a large margin, it will also raise the U.S. dollar's exchange rate and its asset price by a large margin. And if that happens, it will no longer be worthwhile for the hot money to flow into the U.S. - mostly the U.S.' real economy.
Will the U.S. economic decision-makers be happy to see such a situation come true?
The European Union needs the Chinese market and investment to truly emerge from recession and, hence, its leaders don't want the Chinese economy to collapse. And the U.S. will realize its position is not fundamentally different from that of the EU. That vibrations in the Chinese market causes fluctuations in the global market shows the Chinese economy's importance and its comparative advantage in terms of macro-stability. Therefore, the solid fundamentals of the Chinese economy will arrest the flight of capital and cause a reflux of capital from the outside world.
When the subprime crisis broke out in the U.S., capital fled from the U.S. dollar. And when it spread across the world, capital ran back to the U.S. dollar. China is gradually evolving in the same direction.
The author Mei Xinyu is a researcher of economics in the Ministry of Commerce.
