China and emerging markets in general helped through their demand for western goods and commodities to pull the West back from the looming abyss after the 2008/09 financial crisis triggered lengthy recession and stagnation. Australia, Commodity Central, has had particular reason to be grateful for the Chinese economic locomotive for several years now. But it is dawning on the West that it can no longer play the China/emerging market card, even with Sino economic growth rates still at about 7 per cent, when the Chinese abandon their previous talismanic policy of fixing the renminbi to the dollar. Things have got serious.
The obvious inference for already rattled financial markets of the yuan devaluation was that the Chinese economy was in much worse shape than thought, and the government was running out of options to put things right.
Billions of pounds have been wiped off the UK market, and the panic has also set in on Wall Street and in mainland European bourses. There could be more falls to come because there does not seem to be an obvious way out of China’s troubles. China’s factories are not hitting output expectations, car sales are down, much of the property and construction market is busted, and business investment is slowing up.
China now rivals fears of a messy Greek exit from the euro as the eerie presence offstage for investor sentiment. Not least, a big concern is that China’s high-wire yuan devaluation could trigger a currency war among other nervous emerging market countries. These things can build a momentum of their own.
A sign of Beijing’s desperation was its clampdown on big investors selling shares earlier this summer, a novel take on the way a stock market is supposed to operate and reminiscent of President Putin’s “managed democracy” in Russia.
We in the West still cling somewhat forlornly to the pious hope that the Chinese stock market is witnessing a necessary “correction” than full-blown slump.
But stock markets anticipate as much as react, and it looks increasingly like Chinese investors have seen clearly into the country’s gathering economic headwinds, even if everything remains relative to growth rates in the West.
The domino effect could be that investors lose faith in developing countries and, ironically, seek a haven in the West again.
A Chinese economy with feet of clay, possibly competing currency devaluations in emerging markets generally alongside a flight of capital from those markets, would be the nightmare scenario.