Mustafa Sönmez – Hürriyet Daily News/ August/ 31 /2015

China is a huge country accommodating almost 20 percent of the world population. It is a country that has been occupying the world’s agenda in recent years.

We have been watching how this giant, with a population nearing 1.4 billion, has undergone such a huge change over the past 30 years, and how it has joined world capitalism as a “unique” actor. We have been watching with surprise and also with a little fear how it has expanded the system vertically and horizontally, becoming one of the most important players in the power elites.

At the end of this period, China, especially through its moves during the global crisis, has surpassed (by a nose) the world’s number one, the United States, with $17.6 trillion national income according to purchasing power.

Moreover, we know that this growth has been obtained by attracting enormous foreign capital and through exports. The contribution of exports to China’s growth is almost a quarter. There is foreign direct investment worth $1.3 trillion in China. This is an incredible build up. The same China has also made direct investments abroad and its capital exports abroad have reached $600 billion, especially in mining resources.

China has grown with foreign capital inflows, focusing on exports. It has shunned debt generating capital and hot money. Today, its outstanding external debt is only $900 billion, just 5 percent of it national income. Let me remind you that this rate in Turkey is 52 percent.

Jobs, jobs

China does not have a current account deficit; it has a current account surplus. Its current account surplus in 2013 was $183 billion, and it went up to $220 billion in 2014.

China is a giant that includes its workforce continuously into the economy, even if the pay is low. It has to generate jobs for this giant population. Its active population between the ages 15 and 64 is made up of one billion people! Out of this, 800 million have participated in the workforce and only 4 percent are unemployed.
The Chinese economy creates jobs for every citizen, even if they are low paid jobs. One-third of its workforce is still in agriculture, but they want to switch to industry and services for a better pay. The China administration also wants this. For this reason, it is not satisfied with the official 7 percent growth figure.

This gigantic economy is managed quite well by the Chinese bureaucracy and the Communist Party, which are able to overcome minor and major crises straightaway.

Problem in growth 

This new global power is concerned about the recent slowing of its growth acceleration. It fears that the 4 percent unemployment rate might increase. It wants to create fields for new participations in the workforce. It again sees the road to this passing through focusing on exports, opting for devaluation after devaluation last week.

The Chinese Central Bank first devaluated the yuan against the dollar by 1.9 percent, then by 1.6 percent and then again by 1.1 percent. Even this devaluation alone was enough to create tremors and reactions in the world economy.

Against widespread beliefs, China has made its growth based on exports of the last 12 or 13 years not by devaluating its currency, but despite the valuation of the yuan. For instance, in 2006, $1 was 8 yuan but in the following years the yuan increased in value and in 2014, 6.2 yuan equaled $1. Despite this, China grew, without the exchange rate wind, based on exports. In the place where it has arrived today, it has opted for devaluation – making $1 worth 6.4 yuan, motivating its exports.

Black Monday 

First with the earthquake shaking its stock exchange, then with its currency devaluations, China has caused position changes in all actors across the world, especially in the preferences of hot money worth trillions of dollars.

Last Monday, the Shanghai Stock Exchange Composite Index fell by 8.5 percent. Then, the Tokyo Nikkei 225 fell by 4.6 percent, spreading panic to European bourses.

The cause of the tremor was the periphery countries often called the emerging markets, including China. Turkey is also in this group, which enjoyed relatively high growth rates with serious capital inflows after 2009.

The slowing down of China, the expectation that the U.S. Federal Reserve will increase interest rates, and the concern that the falling oil and commodity prices would disrupt the external balances of southern countries, have all changed the direction of the hot money.

It is known that funds worth around $1 trillion have left these countries over the past 13 months. Thus, local currencies have started losing value, slowing exports, and halting growth.

In the IMF’s latest projections, Russia is expected to grow 3.4 percent and Brazil to shrink 1.5 percent, while slowing is also expected in China and South Africa. While portfolios are anchored in safe havens such as the U.S. and German Treasury bonds, in metropolitan capitalist countries a pessimistic atmosphere dominates.

China and hot money inflow 

In the fate of the “emerging countries,” in which Turkey is also included, the preferences of short-term speculative preferences of capital owners play an important role. This hot money which is estimated to total $2 trillion travels in and out of the bourses of the world including Turkey, also affecting the fate of host countries with its preferences and mobility.

Investments in shares and bonds in stock exchanges, weekly entries and exits are monitored by investment consulting agency Emerging Portfolio Fund Research (EPFR). Several official and private institutions in Turkey and the Central Bank are subscribers of the EPFR and monitor the weekly actions of hot money across the world.

According to EPFR data, since mid-2013 when the Fed signaled an increase in interest rates, hot money has seen a lower inflow to emerging economies like Turkey.

In the first eight months of 2015, we see that hot money has opted for an exit from emerging countries. Russia with its crisis since last year has lost a lot of hot money and the ruble has lost significant value. Brazil has also experienced the non-appetite of hot money since 2013, while the Brazilian real has lost significant value.

Turkey 

Turkey, together with Russia and Brazil, is one of the countries that first experienced the “coldness” of hot money and then net outflows. In 2012 and 2013, Turkey saw a significant drop in hot money inflows. This year, not just falls but net outflows are being experienced. The Central Bank said that as of Aug. 21 this net outflow had reached $6 billion cumulatively.

Turkey’s economic indicators are now are not ones that can attract hot money. Political risks are high. The fact that renewed elections scheduled for Nov. 1 are set to be held in a climate of war is increasing the uncertainty for the international investor.

There are also high geopolitical risks. Even though Turkey has synchronized its frequency with the U.S. in the fight against ISIL, it is not quiet visible yet. The same is also true with Germany.

For Turkey’s economy to become an attractive place for the international investor, several stones, especially political stones, have to find their place. But opinion polls predict that the results of the Nov. 1 election will be no different to the results of the June 7 election. This means that political risks will be carried into 2016.

Competing with a powerful China will be more difficult for Turkey, but more importantly competing with Chinese goods in the domestic market will also be tough.  Turkey had a foreign trade deficit of $22 billion in 2014, and this figure reached $11.2 billion in the period between January and June 2015. It is expected to expand further, creating yet another new link in Turkey’s chain of vulnerability.