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China's Bubble
China Fallout: Mongolian Economy in Crisis

Recent Chinese economic weakness has been hurting emerging markets around the world, and no economy has felt the slowdown more than Mongolia. The troubles in Mongolia are a case study in what has already been happening to China-dependent emerging markets around the world, and a sign of things to come. Bloomberg reports:

Mongolia, sandwiched between China and Russia, is an early illustration of fallout from slower growth in the world’s second-biggest economy. “When China sneezes, we get a cold. That is how the situation is. It really affects us in a major way,” Dale Choi, founder and director of the research firm Independent Mongolian Metal & Mining Research, said in a phone interview.

That’s because about 88 percent of Mongolia’s exports — mostly commodities including coal — wound up in China in 2014 and falling revenue from these products is pushing Mongolia deeper into economic crisis. Earlier this month the country’s Finance Minister Bolor Bayarbaatar unveiled emergency austerity measures so the government can pay its bills.

Mongolia is now in an “emergency” situation, planning an austerity package that will lead to job cuts in the bureaucracy and selling shares of state-owned companies. Probably more than any other country, Mongolia combines extreme exposure to Chinese markets with a near-total reliance on commodities exports. Since the fall of the Soviet Union, Mongolia has transitioned towards a market-based economy and has deepened its ties to resource-hungry China, while moving away from resource-rich Russia. For two decades, that strategy worked. But now, Mongolia’s failure to diversify is making for a hard landing.

The Chinese economy is beginning to transition from heavy industry to services. That is good for China, but it means that commodities-driven economies like Mongolia’s will be left in the dust.

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  • Jim__L

    It would seem to me that with over a billion people not in poverty but still poor, there would be enough potential domestic demand in China for durable goods that their demand for resources could continue increasing for a very, very long time.

    Anything else points to either some level of economic failure, or some priority other than increased popular prosperity. As I see it, the numbers tell a different story — one about a Chinese gov’t trying to maintain a current account surplus (exports are falling far less than imports) at the expense of domestic demand.

    If we have a look at the old Mercantilist model that China has been following since gaining MFN status with the US, that model says you run a current accounts surplus so you can spend the rest on military power. That might not apply to this case, but it’s worth looking into further.

  • Jacksonian_Libertarian

    “The Chinese economy is beginning to transition from heavy industry to services. That is good for China, but it means that commodities-driven economies like Mongolia’s will be left in the dust.”

    That’s if you believe the numbers coming out of the Chinese Government, and you shouldn’t. The numbers coming out have China increasing its manufacturing by a 6% annual rate in the latest quarter, and that just can’t be if its imports of raw materials is falling at a double digit rate. Monopolia should have seen a continued increase, as well as the other raw material producers exporting to China. That just isn’t what’s happening.
    There is no avoiding the only Economic Law “Supply and Demand”. Prices can only fall if one of the following conditions exists: 1. supply increases without an equalling increase in demand, 2. demand decreases without an equalling fall in supply. This looks like a case of demand from China falling, while supplies remain the same.

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