We are not used to seeing the Chinese economy in a crisis. However, in the last days and weeks, there are many who thought it is. I state at the outset that I do not believe that this is the case. The Chinese economy is still very strong and is only going through a process of readjustment. Let me put things into perspective.
Analysts cite the fact that the yuan (the Chinese currency) has been devaluated. However, over the last months, the euro and the Japanese yen have both devaluated by around 10 times the amount of devaluation of the yuan. So where is the issue? The dollar and the euro started off at close to par. Then the value of the dollar went down significantly for it to bounce back in the last 12 months or so.
In effect, all the Central Bank of China did was to switch from the yuan being pegged to the US dollar, to a situation of a managed float. So one may rightly claim that all that happened was technical adjustment. After all, both the Federal Reserve of the US and the International Monetary Fund had advocated such a move.
The same day the yuan was devalued, Greece had concluded negotiations with the EU for the umpteenth bailout programme after a process lasting six months. So the spotlight on China may be described as unnecessary, even though one keeps in mind that the Chinese economy represents 15 per cent of the global economy.
The issue is not so much the Chinese economy but the level of preparedness of the other leading economies to this readjustment
The reality is that July had marked a drop in exports by China of around eight per cent. The Central Bank of China had to react and did the right thing – take back from the rest of the world some of the growth it had lent it. Yes, we need to appreciate that the growth experienced by some countries has also been due to Chinese capital. Since 2008, the Chinese economy has been regarded as the anchor of the world economy, and many have assumed that it will remain so for years to come.
China continued to register growth rates of close to 10 per cent, even while the eurozone economy was in deep recession and while the external debt of Brazil, Turkey and Russia exposed the fragility of these emerging economies.
In a situation where the US dollar, the Japanese yen, the Russian rouble, the Korean won, the Indian rupee, the Brazilian real, the pound sterling, and eventually the euro, took it in turns to devalue, the Chinese yuan remained stable. This enabled the yuan to become the strongest currency in the world. China continued to grow its exports in spite of the stronger currency and has also sustained the exports of other countries, such as Germany, Brazil and Australia.
This explains the surprise of many at the news of the Chinese devaluation. They had been busy predicting what would happen if interest rates rose in the US and the UK, while assuming that China would stay put.
Probably the worst hit following the Chinese devaluation shall be the emerging economies, as they may no longer be able to export to China as much as they used to. Moreover, the possible increase in interest rate in the US will make their borrowing more costly. So they will earn less foreign currency but will have to pay out more. This is a situation which is bound to hurt these economies.
What can we expect for the future? I believe there will be some further readjustment, all aimed at ensuring that employment levels are maintained. In this respect, China has done well even this year, with 7.2 million new jobs being created in the first half of 2015 compared to an annual target of 10 million.
The issue is not so much the Chinese economy but the level of preparedness of the other leading economies to this readjustment.