Falling back on a standard excuse of besieged strongmen, President Recep Tayyip Erdogan of Turkey is blaming traitors and outside powers for his nation’s financial crisis, and describing the strong United States dollar as among “the bullets, cannonballs and missiles” foreigners are using to wage “economic war” on his country.
Turkey’s troubles are homegrown, and the economic war against it is a figment of Mr. Erdogan’s conspiratorial imagination. But he does have a point about the impact of a surging dollar, which has a long history of inflicting damage on developing nations.
Like many emerging world currency crises before it, this one comes at a time when the U.S. Federal Reserve is raising interest rates, pushing up the value of the dollar. As the dollar strengthens, developing countries like Turkey have a harder time paying back their dollar debts, and eventually investors start to flee.
But there is an even bigger question looming: The strong dollar that is weakening Turkey’s economy may also be undermining the world’s second-largest economy, China.
In the wake of the global financial crisis of 2008,, Beijing tried to keep its economy humming by ordering state banks to pump out new loans. More than half the increase in global debt over the past decade was issued as domestic loans inside China. There is now much more money circulating in China than in the United States, much of it in the hands of Chinese who are constantly on the watch for higher returns.
So China also faces a serious risk of capital flight. The last bout began in 2015, amid early indications that the Federal Reserve was going to start raising interest rates. China stopped that exodus by tightening its currency controls, but controls rarely work for long. Savvy locals find creative ways to get their money out.
This year, the Fed’s tightening has further strengthened the dollar, while Beijing’s easy money policies have further weakened the renminbi — increasing the incentive for Chinese investors to dump China’s currency for dollars. Right now Chinese can earn the same interest rates in the United States for a lot less risk, so the motivation to flee is high, and will grow more intense as the Fed raises rates further.
So China is in a tough spot. The strengthening dollar threatens to provoke more capital flight out of China, but any effort to shore up the renminbi in response could further slow the Chinese economy. For years Beijing has responded to signs of weakness in the economy by printing more renminbi, which worked fine when the United States was also running a very loose monetary policy. Now that the United States is raising interest rates, lowering rates in China will only give Chinese investors more reason to leave the country.
The fate of the world economy depends on how China negotiates this dilemma. Its $14 trillion economy is more than 15 times larger than Turkey’s, representing about 16 percent of the global economy.