How the growing financial turmoil in China could affect the UAE

Global investors are at severe risk of “Wimbledon neck syndrome” as they frantically switch their focus from one crisis to another. Which threat to world financial stability should be commanding their attention? Greece or China?

The UAE is geographically stuck right in the middle of this particular centre court event, but there seems little doubt which is the bigger potential problem for local businessmen, financiers and policymakers. The country is a long way down the New Silk Road, and any enforced change of direction now would have serious consequences for the UAE’s economic well-being.

The deepening Greek crisis over the past week has somewhat distracted attention from the growing financial and market problems in China. A few people staring nervously at computer screens in Shanghai could not compete with the live drama being played out on the streets of Athens.

But China has been having its very own market crisis which some analysts believe could turn into a serious threat to the country’s economic growth, which in turn would have big negative implications for the rest of the world, the UAE included.

Chinese stock markets have crashed some 30 per cent in the past few weeks. The size of the losses are staggering: on one day recently, the Shanghai Composite Index lost value that was equivalent to the market capitalisation of Apple, or more than US$700 billion.

The Chinese government has rushed in with emergency measures to try to put a floor under the declines. Blaming market manipulators and short-sellers, it has tightened the rules on liquidity requirements and margin trading. With a high proportion of retail investors and a “casino culture” investment mentality, the authorities had to appear to be getting a grip. (It’s a problem UAE market authorities understand.)

Although the sums are huge, you might argue that stock market losses are peripheral to the real economy. Markets can go down as well as up, and even after these recent falls Chinese investors are well in the money, able to bank a net 70 per cent rise in the past 12 months. So what’s to worry about?

Plenty, say the experts. The market bubble is mirrored by a real estate crisis of oversupply and falling prices (again, familiar themes to a Dubai ear), and worries about the health of the financial system, bolstered for many years by “shadow banks” that mask the true extent of indebtedness (not a worry the UAE has).

If all these factors come together we could be in for a “perfect storm” that would rock the Chinese economy to its core. Growth rates have already been slowing down to less than 7 per cent, and anything less than 5 per cent would be regarded as a “hard landing” for China.

Some experts are even talking guardedly about an actual contraction in Chinese GDP next year, which would be a catastrophe for the country and for the rest of us.

China has been the big global investment story for decades: rapid Chinese economic growth has been a constant since 1989, and the Chinese economy was the engine that dragged the rest of the world out of the post-financial crisis slump. If all that grinds to a halt, the repercussions would be severe.

The US economy is struggling to reach economic “escape velocity”, the Europeans face the big unknowns that the Greek crisis brings, and Africa and much of the rest of the world are heavily dependent on Chinese investment.

Only India is a growth area, under Narendra Modi’s more business-friendly policies. But can it really take over the role of world economic leader?

The concern for the Middle East – the UAE in particular and especially Dubai – is that the region is so firmly hitched to the Chinese wagon that it would inevitably suffer in any scenario of negative growth.

Just a few weeks ago, the Dubai International Financial Centre laid out its strategy for the next 10 years, which was underpinned by the emirate’s strategic position as an eastward-oriented financial centre.

DIFC officials were insistent that they could easily switch back westward if economic conditions in the East deteriorated. The danger is that the West will be just as badly affected by a Chinese downturn, and that there will be nowhere else to turn.

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