Daily Management Review

Central Bankers World over Now Left with Unraveling China Slowdown after Lifting of Fed Fog


Central Bankers World over Now Left with Unraveling China Slowdown after Lifting of Fed Fog
The risks that are associated with a slowing down Chinese economy are being assessed by the world’s central banks as they try and estimate the potential risk to their economies. However the central banks do not seem to be close to finding an answer, as most other observers, about what is going on in the world's second largest economy.
Except for a few central banks like the Reserve Bank of Australia and the Bank of Japan who have offices in Beijing, all other central banks of the world including the U.S. Federal Reserve and the European Central Bank have to simply rely on data - that could be flawed - as everyone else.
Along with the uncertainty over the Chinese economy, investors were also uncertain over the possible rate hike by the US Fed. This uncertainty was lifted by the Fed who announced the much expected rise which leaves developments in China at the top of investors' and policymakers' watch lists.
China is the single biggest contributor to global growth and accounts for more than 10 percent of global trade. The impact of the Chinese economy was evident when in September, Fed had to stay its hand when it considered a rate hike after a financial market selloff in China sent ripples around the world.
Rate hikes globally could be delayed or reversed, economists say while describing China's growing influence, if Beijing allows the yuan to weaken further and re-pegs it to a basket of currencies instead of just the dollar.
"We try to get the best information we have... and we talk to everybody. But I don’t think we have any better information than anybody else," James Bullard, President of the Federal Reserve Bank of St Louis.
Over the years serious doubts have been expressed by economists over China's economic statistics and they have sort to use measures such as concrete, steel or electricity production to gauge the economy that has grown almost 10 percent a year for 30 years.
As China shifts to a harder-to-measure services economy from an export-driven manufacturing giant, such gauges have become less useful.
"I don’t think the Chinese government has that good information,” said Bullard.
The lack of communication between the Chinese central bank and the economists and market analysts is seen as another reason or the mystery.
The channels of communication are well developed for the Group of Seven top industrial nations who share a common policy language and well established communications channels. This is not the case of the Group of 20.
Economists cite the example of the People's Bank of China not sending its policymakers to international economic meetings. Such meetings are ideal for the Chinese bank policymakers to mingle with top officials from the Fed, ECB, BOJ and other central banks.
While there are formal interactions, Fed officials say that there is no official hotline with China.
"Almost uniformly, from central banks and international organizations, what I hear is that the Chinese side is reluctant to engage," said Michael Spencer, Deutsche Bank's Asia-focused economist.

This is another major cause of the vagueness that central banks face while trying to assess the reasons for the slowdown in China.
The Fed is concerned with the effect lower Chinese demand for commodities has on economies such as Australia, Canada and Chile apart from the direct impact on the U.S. economy.
New Dallas Fed President Rob Kaplan had ordered his researchers to crunch numbers on China as one of the first things he did when he assumed office in September.

His staff estimates that each percentage point decline in China growth trims 0.2 percentage points from U.S. GDP growth.

"Understanding China’s slowdown is essential because China is still the largest individual contributor to global growth," Kaplan said in his first speech in the new role.

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