8:49PM GMT 09 Jan 2016
22 Comments
For stock markets, it’s been a grim start to the year, and it may be that things will get grimmer still before getting better. Everything rests on China, which is engaged in a herculean battle to defend its currency, the renminbi, against a veritable flood of capital outflows.
For those of us who spent the best part of a decade railing against the iniquities of Chinese reserve accumulation – designed to keep the currency from appreciating and by that means bolster the competitiveness of Chinese goods – this is a somewhat ironic turn of events.
Well, things have changed, and there is no doubt that it will be very bad for everyone should the renminbi go into free fall, setting off a further round of destabilising competitive devaluation in the region and adding to the already powerful deflationary forces coming out of China.
You may wonder why these Far Eastern traumas matter to Britain, less than 6pc of whose exports go to China. You may also wonder why we are worrying about defence of the Chinese currency at all when China still has $3.33 trillion (£2.3 trillion) of foreign exchange reserves to throw at the problem.
The fire power the Bank of England had to play with back in 1992, when it unsuccessfully attempted to defend the pound against speculative attack from the likes of George Soros, looks like a mere pea-shooter against China’s big bazooka.
Yet the fact is that the Chinese are burning through their reserves at frightening speed. It would only take three or four more months of this before China’s once mighty arsenal looks less than adequate for such a large economy. In the meantime, the foreign exchange reserve sell-off is having a similar effect to a monetary tightening, which is just what the fast slowing Chinese economy doesn’t need right now.
China is caught between a rock and a hard place. It risks triggering a dollar debt crisis across the region if it allows the currency to fall, but it further accelerates the economic slowdown by attempting to counter it.
Faith in China’s ability to keep growing at a supercharged rate has always rested on the entirely bogus assumption that because China is a command economy, it can in some way defy the usual laws of economics. Looking at the regime’s incompetent series of policy miscalculations the past year, you would be hard pressed to sustain this view.
