China's Economic Problems Felt Across Worldwide Financial Markets
DAVID GREENE, HOST:
Much of the world has been spared this week as markets have taken a tumble in Asia, Europe and here in the United States. Though early signs today suggest markets abroad could be stabilizing here at weekâs end. The root of all of this appears to be China. And a big question is whether the tumult there will make 2016 a bad economic year. Letâs bring in economist Mohamed El-Erian. Heâs chief economic adviser for the financial services company Allianz and chair of President Obamaâs Global Development Council. Heâs on the line. Good morning to you, sir.
MOHAMED EL-ERIAN: Morning, David.
GREENE: You know, could we start by just looking â taking the long view of China. For so long weâve seen it as such a world economic powerhouse. Weâve been reporting, in recent years, on the economy weakening. I mean, how big a moment is this?
EL-ERIAN: Well, first, China is still a very significant economy. But itâs one going to work developing economists called the Middle-Income Transition. Think of it as going from being a teenager to being an adult.
EL-ERIAN: Things change and you have to adapt. So they have a set of very important structure reforms and theyâre trying to deliver that without sacrificing too much growth. And itâs tricky. And the result of that is that theyâll all spill over to the rest of the world.
GREENE: So in keeping with this metaphor, I mean, is the Chinese government sort of the parents who are trying to manage this teenager growing up and how are they doing?
EL-ERIAN: So think of a teenager who has been relying on his or her parents and now has to stand up on their own. That is what Chinaâs trying to do. Theyâve been relying on selling to external markets, selling to the U.S., selling to other countries, and now they have to rely more on their domestic consumption. That is a major shift. Itâs a very important one. Itâs one that I think the Chinese will successfully navigate. But itâs full of potholes and it requires a lot of agility in the policymaking. And unfortunately, the Chinese have made a few missteps in the last few weeks.
GREENE: But why is it so important that they shift to this more domestic consumption-based economy?
EL-ERIAN: Because theyâve become too big. They can no longer sell to the rest of the world in a manner that generate enough economic growth and enough income for their population. So theyâve become too big for the world. Theyâre too big for the neighborhood. So now they have to rely much more on their own internal drivers of growth. And thatâs a very clear transition that lots of countries go through. No one as big as China and as complicated as China has attempted it recently.
GREENE: Let me ask you this. It seems like investors in other parts of the world are very concerned. I mean, are they concerned specifically about markets that are falling or is there sort of a broad concern that this economic powerhouse might be in trouble, that the government - or the parents, to keep with the metaphor - not, you know, raising this child so well. Is that where, you know, the lack of confidence that weâre seeing the other markets kind of react in this way?
EL-ERIAN: So thatâs a critical question because if you look at what happens in China, it doesnât justify the way the global markets have reacted. Yes, growth is slowing down. Yes, they are weakening the currency which means theyâre trying to take growth from other countries. And yes, they have boosted their own stock market too high, just like we did with housing. However, whatâs fundamentally going on, David, is something else. Markets are realizing that we are exiting the world in which central banks were both willing and able to suppress volatility. If you like, central banks were viewed as marketsâ BFFs - best friends forever. Anything goes wrong, they will come in and they will flood the system with liquidity and they will calm things down. Now that the Fed is starting to hike rates, the markets are getting used to this notion that the Fed no longer has their back. And therefore, any small thing around the world will cause outsized moves in the financial markets. And thatâs what we're seeing today.
GREENE: All right, weâll have to stop there. Mohamed El-Erian is author of the upcoming book, âThe Only Game In Town: Central Banks Instability And Avoiding The Next Collapse.â Thanks so much for joining us on the program this morning. We appreciate it.
EL-ERIAN: Thank you.
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