China's crisis could be even more serious than Turkey's

Falling back into the positions of a strong man under siege, Turkish President Recep Tayyip Erdogan blamed traitors and external powers, for the financial crisis his country is experiencing, and describing the US strong dollar, as one of the <x0lumbat, cannons and rockets” that foreigners are using in “economic battle” against his country.

Many developing markets make themselves vulnerable to the financial crisis, spending more than they can afford, and relying on foreign lenders to finance these distorted customs, but Turkey was an extreme case even before Erdogan went to power in 2002.

His most recent policies -- including defining interest rates at artificially low levels -- and increasing debts, deficits and inflation -- have made things worse.

Many wealthy Turks saw the arrival of another crisis, and began leaving the country before foreigners joined the last few minutes, accelerating the decline of the Turkish lira in recent days.

Turkey's problems originate within the country, and the economic fight against it is a figure of Mr. Erdogan's conspiracy imagination.

But he's right, when he condemns the impact of an increased dollar, which has a long history of causing damage in developing countries.

Like many developing global currency crises before that, this comes at a time when the US Federal Reserve is increasing interest rates, increasing dollar value.

As the dollar strengthens, developing countries like Turkey find it increasingly difficult to pay their debts in dollars, and eventually investors start to leave.

Now the question is whether Turkey is willing to cause a wider global crisis, such as what caused Thai garden in 1997.

The answer is not clear. The decline of the Turkish lira has negatively affected other industrial currencies of developing countries, but few of these countries share Turkey's dual problem of having large external debts, and government policies that fuel inflation.

But there is an even greater question: Strong dollar, which is weakening Turkey's economy, can it also undermine the second largest economy in the world, China?

China is sensitive to a strong dollar for different reasons. At one level, China is far less interdependent with imports than Turkey, which must buy almost all its raw materials, including oil from abroad.

Unlike Turkey, China does not have a chronic trade deficit, and there is no need to borrow a lot of dollars to finance its purchase abroad.

However, on the eve of the 2008 global financial crisis, Beijing tried to stem its economic downturn, ordering state banks to pump new loans.

More than half of the increase in global debt over the past decade was created as an internal borrowing in China.

Now there is more money in China than in the United States, most of it in the hands of the Chinese, who are constantly looking at higher returns.

So China also faces a serious risk of capital evasion.

The last period began in 2015, among the early indications that the Federal Reserve would begin to raise interest rates.

China banned ecstasy, tightening controls over its currency, but rarely controls the performance for a long time.

Local borrowers find creative ways to get their money out. This year, FED's tight monetary policy has further strengthened the dollar, while Beijing's easy money policies have further weakened the reminbin ʹ by encouraging Chinese investors to give up local currency for the US dollar.

Now the Chinese can gain the same interest rates in the United States for a much smaller risk, so the motivation to get out is high, and will be strengthened after the FED further raises interest rates. Beijing can reduce the lure from the strong dollar by trying to increase the value of its currency.

But that would mean the tightening of the reminbi supply, which is likely to undermine the economy, at a time when growth in China is already slowing down under the burden of excessive debt.

China, it has also tried to challenge the hegemony of the dollar, making the reminb widespread, but this is a long-term project, and so far unsuccessful.

Although the United States' share of the world economy is below 23 percent, from a high rate of 32 percent in 2001, the dollar is still the favorite currency for everything, from paying loans to exports and imports.

More than 60 percent of foreign currency, held in reserve by central banks worldwide, is in dollars, and China's ambition to make the reminbin a spare currency has raised almost no interest.

Global central banks and investors are still skeptical if they should keep their money in a currency that Communist authorities can control at any time as they did in 2016.

As this crisis unfolds, attention is likely to shift from the relatively small global threat Turkey poses, to the much larger one presented by China and from President Trump's Tatar wars to coin wars.

Although the Trump administration has accused China of weakening its currency, to make its exports more competitive, China has moved over the last few days to try to prevent reminbit devaluation already below 7 percent against the dollar over the past two months.

The last thing Beijing wants is a sudden crisis of confidence. So China is in a difficult position. A strengthened dollar threatens to provoke a greater capital evacuation outside China, but any attempts to support the reminbin in response to this situation can slow the Chinese economy.

For years Beijing has responded to signs of weakness in the economy, suppressing more reminbi, which has worked well when the United States also had a much more liberal monetary policy.

Now that the United States is increasing interest rates, lowering rates in China will give Chinese investors more reasons to leave the country.

The fate of the world economy depends on how China is handling this dilemma. Its 14 trillion-dollar economy is more than 15 times Turkey's, representing about 16 percent of the global economy. So vital. For the rest of the world, the Turkish lira collapse may prove to be a passing event, and China is likely to determine which way this crisis will go. /The New York Times/bota.al/