in Economy

Uh oh . . . 

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With Elon Musk riding the headlines like a demented cowboy, it’s easy to forget that there ARE other things happening in the financial world. Such as an abrupt 3 per cent deprecation in the renminbi to 6.55 versus the dollar in recent days.

Given that little happens with the Chinese currency without tacit government approval, this is notable, and potentially worrying.

Back in August 2015, a surprise 3 per cent renminbi devaluation triggered convulsions across financial markets, as investors worried that it was the start of something far bigger and spookier.

Another 1.5 per cent devaluation in January 2016 then caused a second spasm of volatility on global markets. China’s FX reserves fell by almost a trillion dollars between mid-2014 to early 2016 due to capital flight and interventions.

Given ongoing fears about China — from property debt shenanigans to renewed Covid outbreaks and draconian, economically-disruptive lockdowns in places like Shanghai — the timing is super awkward. Could this be the start of another 2015 China-triggered tantrum?

Here’s Barclays’ Ajay Rajadhyaksha, the bank’s global chair of research, on the “disturbing parallels to 2015”: 

First, the depreciation was fairly sudden, just like last time. Second, the near-term growth outlook is at least as bad now as it was then. The country is sticking to its zero COVID policy amid a surge of new cases.

Western demand for Chinese goods is likely to slow in the coming months as consumers pivot to services consumption. China’s mega-cap tech firms are trading below March 2020 levels in the face of government crackdowns.

There is the lingering threat of secondary US sanctions amid the Russia-Ukraine war. And of course, that same war is causing a sharp commodities squeeze, and China remains a very large importer of commodities.

The country also has fewer currency reserves. In mid-2014, China had nearly $4 trillion in FX reserves, against $3.2 trillion now. And the Chinese domestic financial system is far larger than seven years ago; in that context, $3.2 trillion is far smaller.

However, Rajadhyaksha argues that there are reasons for optimism. The 2015 mess caught Chinese officials by surprise, but they learnt it. China has become much better at domestic capital controls as a result, and cracked down on loopholes.

For example, in the summer of 2019 China let the renminbi weaken past 7 to the dollar without any signs that it triggered any capital flight. Moreover, the excess liquidity that was sloshing around the Chinese financial system in 2015 is much lower today, and this limits the dangers of a flood trying to come out. Rajadhyaksha reckons.

Our conclusions are not a slam dunk at this point. We are worried, in particular, about how long China plans to persist with lockdowns in the face of highly contagious but less virulent COVID waves. And the country has seen foreign capital outflows in the last couple of months. But given the progress the country has made in cracking down on domestic capital flight, we believe that comparisons to the summer of 2015 are overdone.

Still, it might be worth keeping a closer eye on the renminbi in the coming days and weeks, just in case.

Source: Economy - ft.com

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