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'Chinese slowdown threat to global economy'
28
May '16
China's faltering growth poses a "significant risk" to the global economy, Reserve Bank of India (RBI) Governor Raghuram Rajan has warned.

He underlined the dangers of the Chinese slowdown and its potential effects worldwide, particularly since the country had overtaken the US as the largest trading nation in 2013. But he expressed confidence that Chinese policymakers would mitigate the potential downside.

Rebounding crude oil prices, possibility of a Brexit and geopolitical risks in West Asia pose new challenges to the SAARC economies, the fastest-growing region of the world, Rajan said at a symposium in Mumbai.

“Combined with the previous bouts of leveraged expansion, China now has a number of sectors that suffer from the twin ailments of over-capacity and high leverage,” Rajan said in his inaugural speech at his inaugural speech at the SAARC Finance Governors' Symposium.

Rajan also voiced concerns on the rising bad loans of Chinese banks and weaknesses in the shadow banking system of the world's second largest economy.

“Bad loans in the banking system are likely to grow over current levels—stressed loans are estimated to be around 5.5 per cent of the bank loan book today. In addition, there may be serious weaknesses in the shadow banking system, which could feed back to banks. Clearly, cleaning up the financial system will be a challenging, but necessary task,” Rajan said.

The RBI governor who launched a massive clean-up of Indian banks' balance sheets after an asset quality review (AQR) concluded by the central bank in December, said the exposure of Asian banks, including those of India, to Chinese banks is minuscule and, therefore, they are not facing a direct threat.

“However, some of our countries, though not India, have significant borrowing from Chinese banks, and these borrowings could become costlier if Chinese banks turn inwards. Moreover, financial market losses in China can heighten the risk premia that industrial country investors will charge for investing in our region, and the result could be capital outflows of the kind that were seen last August and early this year,” he said.

Rajan said south Asian countries have to take steps to limit the impact of external uncertainties such as the next rate hike by the US Federal Reserve, a possibly sharp downturn in the Chinese economy, the proposed exit of Britain from the EU and volatile capital flows. (SH)

Fibre2Fashion News Desk – India

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