As the two day meeting held in Turkey came to an end, representatives of the G20 nations, which account for nearly 85 percent of total world trade, kept stressing that fears over China will not affect the global economy significantly. Finance ministers have expresses confidence in the overall economic outlook despite growing proof that global growth is not meeting expectations.
Europe Shows Support for China
The majority of European ministers expressed strong support to Chinese representatives who used the opportunity to convince a number of G20 officials that their currency management arrangements represented a move towards a legitimate floating exchange rate as opposed to being massaged by the government to boost the country’s exports.
Both German Finance Minister, Wolfgang Schäuble, and the EU Commissioner for Economic Affairs, Pierre Moscovici, expressed support and confidence in the sustained growth of China’s economy.
U.S. Reaction More Tempered
The U.S. however, did not share the enthusiasm of its European counterparts, asking the Chinese authorities if they would allow the market be the one to drive their currency up as well as down.
While the Fed is looking closely at the situation before the meeting where it will determine if it will bite the bullet and raise the key U.S. interest rates for the first time in a decade, a lot of analysts are pointing to the fact that the U.S. would not suffer a devastating blow in the case of a sharp Chinese downturn.
With an economy 70 percent focused on consumer spending, The U.S.’s entire export market only accounts for 13 percent of GDP, ranking it among the least vulnerable economies to a Chinese downturn. Furthermore, only 7 percent of U.S. exports go to China, meaning that a 1 percent fall in China’s growth would only affect U.S. growth by 0.1 percent.
A bigger worry is emerging markets. The ripple effect of China’s problems will have a direct impact on them which could cause a more general slowdown in trade, especially for the U.S. which exports close to 50 percent of its products to these economies. Emerging market economies also tend to be vulnerable to any increase in key U.S. interest rates giving the Fed even more food for thought.