Some connections between China and the wider world are apparent. As I argued last week, one is commodities \u2013 the minerals, grains and fuels that China consumes in prodigious quantities. China\u2019s needs dominate these markets. Economist John Mothersole of IHS Global Insight reports that China\u2019s share of world consumption for five major industrial metals (aluminum, copper, lead, nickel and zinc) is now 48 percent, up from 13 percent in 2000.<\/p>\n
If China\u2019s demand for commodities falls below expectations, the ripple effects are widely felt. Commodity surpluses result, depressing prices and profits. New mining projects are canceled. Commodity-exporting countries \u2013 the likes of Brazil, Indonesia \u2013 suffer slower growth. That\u2019s what happened. Although China\u2019s economy is still expanding, it\u2019s expanding less rapidly than predicted.<\/p>\n
Oil is a special case but similar: Consumption disappointed. The International Energy Agency forecasts that China\u2019s oil demand will grow 3 percent in 2015 and 2016, \u201cwell down [from] the double-digit percentage point gains seen only a few years back.\u201d The shortfall \u2013 along with U.S. shale oil \u2013 has created the massive crude surpluses that have sent prices down from more than $100 a barrel in 2014 to $40 or less now.<\/p>\n
But these links between China and the rest of the world are well known. By themselves, they don\u2019t seem to explain why China\u2019s problems suddenly precipitated an international financial firestorm. The answer, I think, lies in what economists call \u201ccapital flows.\u201d Huge amounts of money can shift in a digital instant among countries, currencies and various financial markets.<\/p>\n
In our mind\u2019s eye, \u201cglobalization\u201d evokes images of exports, container ships, and supply chains. This physical globalization does not operate at warp speed. It takes time to deliver a cargo or construct a supply chain.<\/p>\n
By contrast, financial globalization can operate at warp speed. With a few keyboard strokes, investors can dump stocks in one country and buy in another or do the same for bonds and currencies. Since the 1980s, this type of globalization has spread. Most countries have dismantled the restrictions that limited or prevented individuals and companies from moving money across borders. After World War II, these \u201ccapital controls\u201d were widespread.<\/p>\n
As a result, large and unexpected events can trigger panic buying and selling around the world, as traders react to what they think other traders will do. China\u2019s unexpected devaluation, coupled with its stock market decline, apparently constituted this sort of trigger. But the effects of financial globalization go further.<\/p>\n
In a new paper, economists at the Bank for International Settlements argue that the internationalization of finance has diminished many countries\u2019 influence over their long-term interest rates. Especially affected are emerging-market countries such as Brazil. If companies in these countries don\u2019t like domestic interest rates in local currencies, many can borrow in dollars at lower rates, say the BIS economists.<\/p>\n
By early 2015, borrowing in U.S. dollar bond markets by non-bank foreigners totaled an eye-popping $4.5 trillion. \u201cDollar bond markets (have gone) global,\u201d they write. Aside from weakening government central banks, this creates new economic vulnerabilities. One is a currency mismatch: Companies that borrow in dollars must repay in dollars; but if they earn most of their revenue in local money (say, the peso for Mexico), a depreciating currency will make repayment harder.<\/p>\n
Globalization has also punished the United States. From 2004 to 2006, the Federal Reserve raised short-term interest rates by 4.25 percentage points, believing that long-term rates on bonds and mortgages \u2013 which affect the economy more \u2013 would follow. They didn\u2019t. If they had, would the 2008-09 financial crisis have been avoided or softened? Ben Bernanke later argued that a \u201cglobal savings glut\u201d of dollars \u2013 flooding into bonds \u2013 kept long-term rates down.<\/p>\n
It\u2019s not that this sort of globalization is entirely new. Greg Ip, The Wall Street Journal\u2019s chief economic commentator, usefully recalls that the Asian debt crisis of 1997-98 stemmed from excessive capital inflows (mostly bank loans) to countries like Thailand and South Korea. But since then, cross-border money movements have grown and become more complex. These flows are too great to be bottled up; we can\u2019t revert to widespread capital controls.<\/p>\n
Still, globalization is quietly rewriting the economic rules in ways that suggest we may be losing control over events. We are not entirely at the whim of international markets \u2013 but we\u2019re drifting in that direction. Not a comforting thought.<\/p>\n
Robert Samuelson is a columnist for The Washington Post. \u00a9 2015 The Washington Post Writers Group.<\/p>\n","protected":false},"excerpt":{"rendered":"
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