[Opinion] A World Suffering from the G2 Hegemony Struggle

US-Originated Interest Rate Hikes Trigger Global Inflation Crisis
China and Other External Debt Countries Struggle with Debt Repayment

In 1980, the world's number one economic power was the United States (G1), and China ranked seventh. In 2009, China secured the position of the world's second-largest economy (G2). Since then, with rapid growth, it has been eyeing the top spot held by G1, but the situation is not smooth. Since the 1980s, the United States has consistently maintained about 25% of the world's Gross Domestic Product (GDP). The power struggle between the two countries is causing headaches worldwide. The epicenter of the global financial crisis was the United States, and the world shuddered. The massive money printing by the U.S. during the COVID-19 pandemic contributed to global inflation.

Interest rate hikes originating from the U.S. have plunged the world into a furnace of pain and fear. Despite consecutive rate increases, strong employment in the U.S. suggests that there may be one or two more hikes this year. The good employment indicators continue to support an additional rate hike in July. This month, the yield on the U.S. 2-year Treasury note hit its highest level in 16 years since 2007. In May, layoffs decreased, hiring increased, and voluntary quits for better jobs rose in the labor market. In a high inflation environment, strong employment fuels inflation expectations, which can be counterproductive. Central banks base their policies on the belief in an inverse relationship between unemployment and inflation rates.

Consumer Price Index (CPI) peaked at 9% in June last year. This June, due to the base effect, the CPI is expected to drop to the 3% range, leading some to argue that raising interest rates amid falling prices is unjustified. The problem is that core inflation, excluding agricultural products and petroleum prices, remains unstable, and due to a reverse base effect, prices may rise again in the second half of the year. With high real estate project financing (PF) loan delinquency rates at Saemaeul Geumgo and securities firms, the financial market environment is unfavorable, making continued U.S.-led rate hikes a significant burden for us.

China's employment situation is not as good as the U.S., with youth unemployment hitting a record high of 20.8% in May. The deteriorating economic conditions of the youth, who account for 20-30% of total consumption, lead to reduced spending, delayed real estate market recovery, and social unrest. Due to the base effect from last year's low growth rate, growth in the 5% range is possible, but signs of economic deterioration are visible here and there. China's Producer Price Index (PPI) in June fell at the steepest rate in seven years (-5.4). The consumer price inflation rate is at 0%, indicating signs of deflation. Despite economic reopening after the pandemic, domestic demand has been weaker than expected, prompting preparations for large-scale stimulus measures following interest rate cuts.

The timing of announcements has been repeatedly delayed, causing frustration among economists hoping for economic stimulus in China. Considering that real estate accounts for a quarter of the economy, discussions have included issuing special government bonds worth 1 trillion yuan, new infrastructure construction, and lifting restrictions on multi-home ownership. Meanwhile, countries heavily indebted to China?such as Zambia, Uganda, Kenya, Ghana, the Democratic Republic of Congo, Ethiopia, Mongolia, Laos, Pakistan, Sri Lanka, Ecuador, and Honduras?are struggling with disappearing jobs, soaring prices, and debt repayments to China, pushing large portions of their populations into poverty.

More than 50% of these countries' external debt is owed to China, and over one-third of government revenues go toward debt repayment. The backlash of debt is hitting poor countries. The Belt and Road Initiative (一帶一路: the overland and maritime Silk Road connecting China, Central Asia, and Europe) has not been efficient from the perspective of the investment recipient countries. China monopolized key global resources, expanded its economic, diplomatic, and security influence, while the recipient countries failed to generate adequate returns. Was the debt trap an inevitable outcome? When crises occur, it is the poor people and countries that suffer the most. It certainly feels like poverty is being continuously manipulated amid crises.

Jo Won-kyung, Professor at UNIST and Director of the Global Industry-Academia Cooperation Center

This content was produced with the assistance of AI translation services.