more pain for the Chinese.This is the great
paradox. Normally, a growing US economy is
good for the whole world.This time,
however, because of these links to China, a
growing US economy raises fears that it might
make the global situation very much worse.
The obvious answer is for China to devalue
the renminbi – and it has taken a couple of
steps in this direction. But this risks seriously
damaging its already fractious relationship with
the US. If China devalues as part of a move to
become a normal open economy, where capital
can flow in and out without restriction, then
Washington would have few complaints.
However, if the currency rate is cut without
such reform, so that China can export at will
while continuing to deny open access to its
own markets, it could presage a major souring
of relations at an already sensitive time.At
worst it could trigger‘beggar my neighbour’
competitive devaluations – as happened in
the 1930s – in which nations pursue policies
to the disadvantage of their rivals, rather than
for mutual benefit.Then we really would be
in trouble.
So there is much for the world to worry
about, but things do not have to end in tears.
The declared Chinese ambition is to move
its economy from reliance on exports to
reliance on domestic consumption while
normalising its trading relationships with
the rest of the world. But this requires the
Chinese leadership to face down a lot of
vested interests, to say nothing of all the
other challenges embedded in such a huge
shift. But thus far, and with only a few
hiccups, it seems to be sticking to the task.
If the programme goes smoothly it could
deliver enough Chinese growth to reassure
the world’s investors that, once again, we will
muddle through; but every time it seems to
falter it could provoke more uncertainty and
market turmoil. Either way, China will surely
get there in the end; but that begs the
question of how many times the rest of the
world will catch a cold on its journey.
The wise investor should be well stocked
with handkerchiefs.
Shutterstock
Balance sheet
With the global economy growing
increasingly reliant on China to produce much of its
growth in recent years, a slowdown in the Chinese
economy could have long-term widespread repercussions.
ANALYSIS
CHINA
Today China, aswell as
the US, only has to
sneeze for the rest of us
to catch a cold
renminbi a notch higher, it increases the cost of
Chinese exports and makes things worse.
And that is not the only point of pressure.
Elsewhere in the world, the use of quantitative
easing to bring about devaluation in Japan
and Europe – two of China’s biggest trading
partners – has further underlined its plight
because their weaker currencies make imports
from China more expensive, putting further
pressure on its economy.
This is why there is such concern about the
prospect of an increase in US interest rates.
The Federal Reserve may raise rates to stop
the US expansion getting ahead of itself – a
legitimate domestic concern. But the impact
overseas could be profound if higher US rates
lead – as is likely – to an even higher dollar and
2012
85%
2013
54%
2014
36%
2015
20%?
O
ld hands at the
investment game
say you almost
always get a crisis in
August. Summer can often
be an uncertain time in the stock market as
experienced investment managers head off on
holiday, often leaving their juniors in charge.
The combination of thin markets and nervous
traders makes for a volatile mix when
something out of the ordinary happens. But
however choppyAugust may be, things tend
to settle down in September.
So far, however, the summer nervousness
has continued into early autumn and should
not be too lightly dismissed.The difference is
China. China is the world’s second-largest
economy and the biggest trading nation, so
what happens there affects us all.Today China,
as well as the US, only has to sneeze for the
rest of us to catch a cold. You can see this all
too easily from an International Monetary
Fund analysis inAugust 2015, which
highlighted how Chinese growth has spurred
the expansion of world trade since the
financial crisis.
In 2012 China drove 85% of the increase.
This dropped to 54% in 2013 as China’s
economy slowed and the rest of the world
recovered a bit, and it dropped again to 36%
last year.That means other regions are having
to take up the slack as China’s share of global
growth falls. But Europe is barely growing
and, while the US is recovering, the pace is
slow. The concern is that if China’s economy
stays flat or deteriorates further, then the
stimulus it delivers could drop as low as 20%
for the rest of the decade. Investors are
apprehensive because they have no idea what
will pull the world forward if the Chinese
locomotive is derailed.
The obvious answer is that theAmericans
will have to do it. But there is a further
problem, which is thatAmerica and China are
yoked together because the renminbi has long
shadowed the US dollar. Unfortunately, this
means that as the US recovers and the dollar
becomes stronger on the foreign exchanges,
it pulls the renminbi up with it. Chinese goods
are already no longer the bargains they were
and its exports are increasingly uncompetitive
because of surging domestic inflation and rapid
wage growth. So every time the dollar pulls the
HOW THE CHINESE
CONTRIBUTE TO
WORLD TRADE GROWTH
THE INVESTOR
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