Full brunt of crisis yet to be felt

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By Hong Liang (China Daily)
Updated: 2009-02-24 06:53

The sharp fall of the Chinese stock market last week was a shock only to the overly optimistic investors who believed that the economic stimulus efforts by governments of both developed and emerging economies were the magic pill for recessionary woes.

To be sure, share prices have stabilized since last Thursday and the key indicator did make some gains in the past several trading sessions. But the troubles of the global economy are far from over and their full impact on the economies of emerging markets is yet to be felt.

Many economists have been warning about what they dubbed "the second wave" of the unfolding financial crisis. Their notion has been reinforced by the unexpectedly poor 4th quarter results of some of the world's most prominent financial institutions.

As noted by Hong Kong monetary chief Joseph Yam, the size of these losses has led to "renewed concern about the severity of the crisis, at a time when many have been hoping to see improvements."

So far no signs that the financial systems of the developed economies are recovering have emerged.

The further tightening of credit in the developed markets could drag the global economy deeper into recession, negating the efforts of various government economic stimulus packages.

Under these circumstances, little hope of recovery exists for world trade in the near term. Some economists have predicted that final demand in developed markets will continue to shrink, resulting in a continuous decline in imports from emerging economies.

The global economic outlook is further clouded by rising protectionism in trade and finance. Some politicians in the world's largest economy are demanding to include trade protectionism provisions in the government economic stimulus program. Such a move would invariably stir strong protests from emerging economies whose governments could be swayed by public sentiment to introduce retaliatory measures.

Reverting from globalization, which is widely recognized to have benefited the world economy through the efficient deployment of capital and labor resources, to protectionism could have disastrous effects, particularly on the emerging markets. What's even more troublesome is the rising tide of financial protectionism that is threatening to clog the flow of international capital, which economists say could be catastrophic for developed economies and emerging markets.

In his latest essay published on the Hong Kong Monetary Authority's website, Yam wrote that the globalization of financial markets has been "instrumental in the growth and development of the global economy" by making available financial resources to developing economies.

If financial institutions (of developed markets) are prevented from lending overseas, "external finance for the developing economies may dry up," Yam wrote.

The subsequent shortage of capital could force the governments of developing economies to run down their foreign currency reserves, which are helping to finance the budget deficits, and, indirectly, domestic expenditures of some major developed countries.

As we all know, the advance in telecommunications technology has made it possible for large amounts of capital to flow across national borders in an instant. For that reason, the impact of financial protectionism can spread much more rapidly than that of trade protectionism.

That is something to bear in mind when we decide where to park our savings in coming months. Blind optimism can have dire consequence in these trying times.

E-mail: jamesleung@chinadaily.com.cn