Commentary A: The Effects of a Slowing Chinese Economy on the World
Last year, the Chinese economy reported a 6.9% growth rate for the economy overall (The Economist Staff 2016). For all intents and purposes, a 6.9% annual growth rate is immensely healthy; a country like the United States generally experiences a significantly lower growth rate for a number of reasons. However, the United States is considered a developed nation, while China is still in the developing stages of growth (Qi 2016). However, despite these respectable numbers, some economists are quite alarmed at the current situation in China—and some have even begun to draw attention to the slowing Chinese economy as the harbinger of doom for the global economy as a whole (Qi 2016; The Economist Staff 2016).
There are a number of reasons that this growth rate is concerning for the United States and for other developed nations. The first, and perhaps the foremost reason that the drop in growth is so concerning is that no economist believes the numbers that are coming from the Chinese Communist Party (The Economist Staff 2016). The Chinese Communist Party is renowned for manufacturing data and figures, and the reality is that if the CCP is reporting a slight decline in growth, the reality is probably much bleaker. The Economist Staff (2016) write that the past six quarters’ growth in China has been 7.2%, 7.2%, 7%, 7%, 6.9% and 6.8% respectively; this kind of trend, they say, is quite unlikely from the perspective of an international economic trend (The Economist Staff 2016). While these numbers are not impossible, they are highly improbable: indicating that the realities of the Chinese market are still quite unknown, and any decline at all has the potential to be damaging to the world economy (Qi 2016).
A downturn in the Chinese economy has the potential to be problematic for firms around the world—not just in the United States. Although manufacturing has been outsourced all around the world, China is still one of the largest sources of consumer goods—and these consumer goods are in high demand in the west (Qi 2016). However, despite this massive demand, the forecast in March was poor in 2016; the economy remained slow despite experiencing the normal, brief uptick in economic activity that is normal in the days following Chinese New Year (Qi 2016).
The Chinese economy and the American economy are quite interconnected, and China has made a number of interesting and potentially dangerous financial and economic changes in recent months that have put the overall stability of the Chinese economy in jeopardy (Qi 2016). In August of 2015, the Yuan—the Chinese national currency—experienced a surprise and unexpected devaluation. This change caused jitters in the market in addition to normal stock losses that are associated with currency devaluation (Qi 2016). The loss of bargaining power from the Yuan caused serious problems in the Chinese economy as a whole, and the stock markets in China—although still more powerful than they were a full year ago—essentially experienced a free fall in the early days of 2016 (The Economist Staff 2016). The Chinese markets do not currently have the infrastructure or protections that exist in many market structures in other parts of the world, particularly in the western world (The Economist Staff 2016).
Despite the crash in the stock market, however, it seems highly unlikely that China will begin to experience a true recession (Qi 2016). Unfortunately, it is very hard to predict the actions of the Chinese stock market. While other stock markets might react to market pressures and changes, the Chinese stock markets are still rigidly controlled by the government; this makes them prone to strange and unpredictable behavior as the leaders in the government manipulate and change policy to bolster the strength of these stock markets (The Economist Staff 2016). There is no evidence that China will enter a recession, even with the current economic and financial problems that they are facing.
The interaction between the Chinese stock market and the global stock market has been incredibly interesting. The Economist (2016) suggests that when the Chinese economy and stock market went into freefall, approximately $5 trillion USD was lost in the global stock exchange system; this is an incredibly significant loss for the economy as a whole. In a world where the American economy is just starting to recover from one of the most significant recessions in recent history, the suggestion of a Chinese market crash does not inspire confidence.
It is likely that in the wake of this freefall, many companies are going to start diversifying their supply chain in case economic chaos breaks out in China in the near future. While removing the supply chain from China entirely might be impossible, many American companies are likely moving towards a diversified supply chain in the region, including factories outside CCP-controlled geopolitical spaces.
Commentary B: The Economics of Tax Havens and the Panama Papers
In the past month, more than 11.5 million documents with confidential status have been leaked onto the Internet by an anonymous contributor. Because this event is still unfolding, not all the information is available as of yet, but there has already been some significant analysis done on the papers that were released to the press and on offshore tax havens as a whole (The Economist Staff 2016). These documents exposed many individuals and companies around the world participating in illegal, tax-avoiding activities; the companies and individuals involved still have not been fully investigated (The Economist Staff 2016).
Tax havens are an interesting and important facet of the current global economy, although morally and legally most companies should not utilize tax haven services. There are some exceptions, of course, and not all companies and individuals who use offshore financial centers for banking and transactions are doing so immorally, unethically, or illegally (Kutchinsky 2016). A tax haven is any country that has relatively lax banking standards; these countries are often bankers for many individuals who are not citizens (Kutchinsky 2016). These countries do not require the companies or individuals to pay significant taxes on the money that they keep in their system, and most do not require that companies or individuals disclose the manner in which their money was acquired. Overall, these offshore financial centers offer little in the way of regulation, and they allow individuals and businesses to avoid paying the taxes that are due to their home country (The Economist Staff 2016). This tax avoidance is a strategy that is illegal in most cases in the United States (Kutchinsky 2016).
While tax avoidance is problematic and associated with a number of serious social concerns, another significant problem associated with tax havens and other offshore financial centers is that these countries are responsible for significant amounts of the world’s money laundering (The Economist Staff 2016). The Panama Papers revealed just how significant this problem is: trillions of dollars each year go through these offshore financial centers, and much of that money is filtered through to avoid scrutiny (Kutchinsky 2016).
Many high-profile individuals were associated with the Panama Papers when the papers were flooded onto the Internet. The President of the UAE, the Prime Minister of Iceland, and President of China were all named as parties who utilized the offshore services of the law firm that experienced the leak (The Economist 2016). While this underscores what many people suspected about the rich and powerful around the world, it will also be interesting to see how this event develops: seeing proof of corruption and misuse of funds is quite different from suspecting and having no proof at all. For the global economic structure, this leak carries a number of interesting implications. First and foremost, after the leak, it seems likely that individuals and companies will be more concerned and paranoid about engaging in offshore banking activities out of fear of being exposed again—this might have the effect of driving the offshore tax haven economy further underground, however (Kutchinsky 2016). There also might be very little in the way of global response: each country could potentially respond differently to this revelation, and some countries might not respond to the leak at all—China, for instance, might do nothing.
The global consequences for this leak, however, have yet to be determined. As the Economist Staff (2016) suggests that corruption has become extremely lucrative for the families and friends of many politicians around the world (The Economist Staff 2016). Corruption pays for the powerful, but it also pays for the families and friends of the powerful. It seems that despite the economic downturn, some families around the world have become incredibly successful; this seems to indicate that many of the people and companies that have been using these accounts—accounts with the lawyer whose clients’ information was leaked—are highly corrupt (Kutchinsky 2016; The Economist Staff 2016). Corruption undoubtedly plays a very significant role in the development of these huge offshore accounts, although the lawyer himself claims that he has done nothing illegal (The Economist Staff 2016).
The Economist Staff (2016) suggest that this leak allows the International Consortium of Investigative Journalists to dig deeply into the corruption in the political world in a global sense. The Economist (2016) suggests that the papers that were released onto the Internet have provided journalists with the tools needed to slow and halt financial and economic corruption in the political sphere in many developing countries; however, it seems more likely that corruption will continue in different ways. However, greater awareness regarding economic havens might also allow for investigations into questionable economic practices; eliminating corruption from the global marketplace would undoubtedly make the market stronger in the long term. Many people who utilize these tax havens are individuals who are politically corrupt as well as economically corrupt. There are significant links between political corruption and economic corruption that should also be exposed to the people (The Economist Staff 2016).
References
Kutchinsky, S. 2016. How the panama papers investigation unfolded. [online] Newsweek.com. Available at: http://www.newsweek.com/panama-papers-icij-journalism-investigation-finance-445987 [Accessed 10 Apr. 2016].
The Economist Staff. 2016. The lesson of the Panama papers. [online] The Economist. Available at: http://www.economist.com/news/leaders/21696532-more-should-be-done-make-offshore-tax-havens-less-murky-lesson-panama-papers [Accessed 10 Apr. 2016].
The Economist Staff. 2016. The worries about China’s slowing growth. The Economist. [online] Available at: http://www.economist.com/blogs/economist-explains/2016/01/economist-explains-11 [Accessed 10 Apr. 2016].
Qi, L. 2016. Early Look: China’s Economy Likely Slowed in First Quarter; Green Shoots Emerging. [online] WSJ. Available at: http://blogs.wsj.com/chinarealtime/2016/04/08/early-look-chinas-economy-likely-slowed-in-first-quarter-green-shoots-emerging/ [Accessed 10 Apr. 2016].
