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Opinion

The Coming Chinese Sneeze

By Viral Acharya

Viral Acharya on flight from US treasuries

The debt binge in China is beginning to cast a perilous shadow on the health of the global economy. Indeed, one can argue this to be the most significant long-run threat to growth.

It is an interesting time to take stock of the global economy. It used to be said that when America sneezes, the rest of the world catches cold. The events of last year suggest anything but the same. It is now the case that when America recovers, the rest of the world catches cold. This reversal is due to the fact that good news for the American economy is bad news for global liquidity.

The Federal Reserve strengthens its resolve with each piece of good news to “taper” its unconventional monetary policy. In turn, as treasury yields rise, asset managers retrench from higher-yielding assets towards safe havens.

While the Fed taper is what seems to have been the proximate cause of the recent turbulence, most notably in the emerging markets and their currencies, the growth prospects for the emerging markets less affected by the taper also deserve careful scrutiny. Of these markets, China merits attention. The debt binge in China is beginning to cast a perilous shadow on the health of the global economy. Indeed, one can argue this to be the most significant long-run threat to growth.

Read full article as published in LiveMint

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Viral Acharya is the C.V. Starr Professor of Economics and the Director, NSE-NYU Stern Initiative on the Study of Indian Capital Markets.