Will the now self-evident slowdown in the Chinese economy result in a hard landing? Will it prompt another outbreak of deflationary "currency wars” among the world’s biggest economies? Does it presage more wide-ranging debt and currency crises in emerging markets? And, perhaps most important of all, can Western economies and stock markets ride out these storms relatively unscathed?
The first of these questions is perhaps the hardest of all to answer, if only because it has always been notoriously difficult to understand precisely what is going on in the Chinese economy. Official Chinese data on output is invariably unreliable, perhaps now more so than ever, with the authorities desperate to ensure compliance with the official target.
Officially, China is still on course to meet the target of 7%, yet many outside observers believe that growth has already slowed to 4% or less, which for China is tantamount to stall speed. Exports and factory production are already in contractionary mode, exerting continued downward pressure on commodity and energy prices. This in turn is badly affecting resource-dependent economies such as South Africa, Brazil and Russia; especially those with big foreign debts, which will be swelled further by depreciating currencies.
For optimists, the Chinese slowdown is essentially yesterday’s story, more a reflection of last year’s fiscal contraction than anything more sinister. This has now been reversed and, if the optimists are right, the Chinese economy should soon be rebounding strongly.
Believe it if you will, since the onset of the Western financial crisis, the Chinese authorities have engineered one of the biggest credit expansions of the modern age. To think that this is going to end anything other than badly requires blind faith in the idea that China, as a centrally planned, command economy, has somehow succeeded in suspending the usual laws of economics and finance. What’s more, China’s prescribed transition from an export/ investment dependent economy to one more focused on household consumption is proving much more difficult than anticipated. The one is slowing more quickly than the other one can grow.
In any case, true believers in China’s powers of levitation will have had their faith sorely tested by the incompetent handling of the recent stock market crash and currency devaluation. Rather than restore confidence, these actions have merely served to broaden the panic.
Since the onset of the Western financial crisis, the Chinese authorities have engineered one of the biggest credit expansions of the modern age.
Few believe the official explanation for what at the time of writing was admittedly a quite marginal devaluation – that it should ease the renminbi’s passage to reserve currency status. To the outside world, it looks much more like the start of another phase of competitive currency devaluations, with a fast slowing China once again attempting to steal demand from America and elsewhere. Already the tensions are evident. In the US, the Republican presidential hopeful, Donald Trump, does not mince his words. “They are destroying us. They will keep devaluing their currency until they get it right. They’re doing a big cut in the yuan and that’s going to be devastating for us”.
Yet in all this there is a silver lining. Like a constantly receding horizon, the point at which US – and UK – interest rates begin to rise again looks like being pushed further out into the future.
Like a constantly receding horizon, the point at which US – and UK – interest rates begin to rise gain looks like being pushed further out into the future.
Paradoxically, Chinese travails could therefore end up being quite good for the consumer led recovery that both the US and the UK seem to be enjoying, at least in the short term. Cheap credit and lower commodity prices will put more money in people’s pockets for discretionary spending. At the same time, the Chinese slowdown, in combination with the pressures for competitive currency devaluation, may help keep the central bank printing presses purring for much longer than otherwise. Where the US Federal Reserve and the Bank of England have left off, the European Central Bank, the Bank of Japan, and now the Chinese authorities, have taken up the quantitative easing baton with equal, if not even greater, enthusiasm.
For the moment, markets can’t figure out what to make of the Chinese slowdown. Outside raw materials and energy, China is not a big importer, so the impact on global demand may not be that significant. As the summer draws to a close, the bears certainly have the upper hand. Even so, this may be no more than a mid-cycle squall, of the type that is fairly common at this stage of a global expansion. The potential for it to turn into something much uglier is none the less all too obvious.
Jeremy Warner is one of Britain’s leading business and economics commentators. A serial winner of awards, he has also been honoured for an “outstanding contribution in defence of freedom of the media” by the Society of Editors for his refusal to reveal sources to Government inspectors. He is currently assistant editor of The Daily Telegraph.
