By Monish Chhabra ǀ 24th December 2015

On 13th November, the city of Paris was shaken by a series of terrorist attacks that claimed 130 lives. Two days later, the French air-planes launched their biggest airstrike in Syria.

Violence in any form – aggression, oppression, retribution, anger or insult – transfers one man’s misery to another. It breeds in the victim, who then looks to pass it on to someone else. The cycle continues.

In the face of differences, annoyance or hostility, it is much easier to be violent than to be not. Sometimes, such violence may seem to solve some problems. But the fix is temporary and shallow.

Even when it seems to achieve some goal, an act of violence always needs justification. To hurt someone can never be right on its own, thus it is given context to make it seem acceptable.

That is evidence enough that it cannot be the ‘truth’. For the truth needs no rationalization or qualification. It is sufficient and complete just by itself.

A solution achieved by violence can sometimes look productive, but it can never be creative.

Production is not the juice of life. It is forced; copying, cloning, replicating, re-assigning, re-arranging. At best, it achieves only what is known and expected.

However, ‘creation’ is magical. It realizes the improbable, even the impossible. It bridges real with unreal. Through that bridge, the flow becomes endless and ever-increasing.

Creation demands courage. Production requires only compliance.

Such courage comes from the freedom of spirit. It burns and shines in its own luminance...even when it fails in its attempts.

On 8th of November, Aung San Suu Kyi came to power in a historic election in Myanmar. She had also won the last election 25 years ago, which was nulled by the army, and she was put under house-arrest for two decades.

For 53 years, the military has ruled this country with an iron grip. Now people have voted into power a team of farmers, teachers, shopkeepers, doctors and even a poet.

Giving the reins of the country to these common folks is the common human spirit, which yearns to break free of the repression.

It is the spirit of courage, not compliance. It prefers the disorder of inexperience, over the order of tyranny.

Emerging markets are in the midst of certain disorder of their own.

For the first time in 27 years, the capital flows to emerging markets (EMs) are expected to be negative this year.

Net flows comprise of two components: foreign flows into the country, minus the resident flows out of the country.

The foreign inflows this year are about half that of 2014. The key culprit is the credit flow. Foreign banks didn’t just reduce their lending, they actually withdrew funds out of the EM countries.

On the other hand, the resident outflows are setting a new record. The locals of the EM countries are lending and investing abroad like never before.

Just 5 years ago, investors were pouring so much money into the emerging markets that these countries had to institute capital controls to slow down the inflows.

In October 2009, Brazil imposed 2% tax on foreign flows into its stocks and bonds. In June 2010, Indonesia imposed minimum holding period on certain government bonds.

Those events sound almost mythical today.

Last month, China’s foreign exchange reserves fell by $87 billion.

China had built up the largest reserves in the world, peaking at $4 trillion in mid-2014. This was the result of 25 years of running the twin surpluses of current account (exporting more than importing) and capital account (more money inflows than outflows).

This put upward pressure on the renminbi, which was a good problem. The currency’s appreciation was very gradually managed by soaking up the dollars and hence adding to the reserves.

All this changed in the second quarter of 2014. The net capital flows turned negative (i.e. more capital going out of the country than what was coming in) and have stayed negative ever since.

This has put downward pressure on the renminbi. The authorities have been defending it by using the reserves. They may have underestimated the force of reversal.

Over the last 18 months, China has lost an estimated $700 billion of its reserves.

Of course, the reserves can’t be run down to zero. Each country has to keep a safe amount for trade and credibility. Using different estimates, it seems China cannot let it reserves fall much below $2 trillion.

At the rate the reserves are currently falling, the currency can be defended for only 1-2 years more. It could be shorter if the capital outflows increase further. Thus, the seemingly large reserves may not be large enough for an endless defense of this magnitude.

A greater cause of concern is the fact that this fall in reserves has happened despite running a massive current account surplus during this period. It seems China cannot export its way out of its trouble with capital flows.

In fact, history shows that a troubled capital account can overwhelm a benign current account, in the making of a financial crisis.

Another defense often cited is that China doesn’t have an enormous amount of external debt.

However, the reported debt statistics may not reflect the full picture. Borio et. al (2014) show that EM corporations have been taking on substantial external debt that is not captured by residence-based statistics.

This happens when offshore subsidiaries borrow in foreign currencies, and then send the proceeds to their headquarters either as FDI (foreign direct investment) or as over-invoicing (by inflating the exports between the two related entities).

The estimate shows that the outstanding foreign debt of EM economies could be almost double the reported number, when it is measured by the nationality of the issuer (inclusive of foreign subsidiaries that borrow abroad) rather than the residence of the issuer (counting only the headquarters’ direct foreign borrowings).

As dollar squeeze increases, such inflows that were not reported as debt, would reverse outwards to satisfy offshore liabilities. They may be mislabeled again, as out-bound investments by residents, or under-invoicing of exports, or over-invoicing of imports.

For a long time, money was too easy and cheap. Now, it is turning the other way.

Violence, however, always stays the same. Easy and cheap.

Whatever may be the reward of it, the cost is our consciousness. That is a big cost to pay.