Due to the strong relationship that Pakistan has with China, the economic crisis in China is raising alarms in Pakistani markets. For the Pakistani economy there is good news and bad news.
There is some reason to hope that the economic slowdown in China might not lead to a global recession. In a new report, Gabriel Sterne of Oxford Economics finds comfort in two stabilising forces. The first is the determination in Beijing stop China from bringing on a global collapse. The second is the US recovery. Additionally, the world is in better shape to handle China’s troubles than before. Looking at East Asia, since the 1997 crisis, governments in the region have strengthened financial systems, internationalized banks, increased transparency and built up defences against renewed turbulence, amassing trillions of dollars of currency reserves.
The bad news is that that the US recovery and East Asian stability will not have much of an effect on Pakistan’s markets as they are very unstable- we may see our own localised recession.
The best hope that analysts are giving is that there is a possibility that China’s Aug 11 devaluation might not trigger a foreign debt crisis. Property prices aren’t collapsing, nor is unemployment surging. The best hope for Pakistan’s economy, which has already felt the shock of the Chinese devaluation and stock market falls, is that global expectations about China’s survival remain intact. Expectations have a huge impact on investments and investor confidence and can often be the catalyst for crisis. And in fact, the Chinese crisis is must smaller in its scope that the collapse of Long-Term Capital Management in 1998, the tech bubble bursting in 2000 and the 2008 Lehman crisis. Let’s also remember that China is a communist country, with no pre-existing free-market ideologies that will inhibit state interference into economic policies. While American and Europeans financial institutions were allowed to run amok until it ended in tears, the state is monitoring, managing and actively interfering in the crisis.
Nothing matters more than stability at home and the Chinese brand abroad. It may all collapse anyway; contained government stimulus to fight deflation will create bubbles and debt. However, the best way forward is to stay optimistic.