The new year kicked off with a global stock market and commodities rout over worries about the global economic outlook and China’s economy in particular. Plunging prices recovered at the end of last week, partly on reassurances of more stimulus to come from the European Central Bank, but traders are bracing for more volatility. At one point, oil prices fell below $28 per barrel – a 25% drop since the start of the year – on the combined effects of a supply glut and waning demand. Investors have dumped riskier stocks in favour of safe-haven assets, such as gold and government bonds. The FTSE 100 index of London-listed shares bounced back but is still down more than 5% since the start of the year.
What do the experts think?
Cutting its forecasts for global growth, the International Monetary Fund expressed concern about a slowdown in emerging market economies, China’s difficult rebalancing away from an exports-driven economy, lower commodity prices and the ending of ultra-loose monetary policy in the US, which has just raised its interest rates for the first time in almost a decade. The IMF warned that recovery from the financial crisis could be derailed if key challenges are mishandled.
The European Central Bank has also pointed to the downward pressure on eurozone growth for similar reasons. Its president, Mario Draghi, hinted the ECB was ready to print more money and cut borrowing costs, to counter those headwinds.
What is China’s role in this?
Worries about China’s true economic strength are at the heart of the jitters. After more than a decade of double-digit growth, during which it overtook Japan to become the world’s second largest economy, things have inevitably slowed down. Last year China’s GDP officially expanded by 6.9%, the slowest pace for 25 years; some say the true picture could well be half that. Other economic data from China has underscored the country’s mammoth task of rebalancing the economy away from reliance on its vast manufacturing sector and exports to a more diverse mix.
China’s woes are being felt in other economies because it is such a big commodities consumer: the slowdown in the world’s biggest energy user is weighing on oil prices. There have also been dramatic swings on China’s stock markets. A debt-fuelled rush of individual investors helped inflate a bubble on China’s main exchanges but it burst last summer. There have been more steep falls in recent weeks. The CSI300 index of the largest listed companies in Shanghai and Shenzhen is down 16% since the start of this year and 42% since a peak last June.
More worrying are the moves in China’s currency. Beijing stunned markets last August by devaluing the yuan, taken by some as a distress signal. A weaker yuan cheapens Chinese exports, shoring up its manufacturing sector. But the fear is that China will “export” deflation because a cheaper yuan cuts the price of its imports in advanced economies. Sharp swings in the currency this month have fanned fears China could repeat last summer’s move but policymakers insist they have no fresh intentions to weaken the yuan.
Finally, there is scant confidence among investors in Beijing’s ability to manage economic transition following a string of seemingly futile interventions in markets and confused messages from policymakers. Six interest rate cuts since November 2014 have failed to halt the economic slowdown. A mechanism to curb stock exchange volatility – a so-called “circuit breaker” – was introduced this month and then scrapped within days after it appeared to merely exacerbate the mayhem on markets. Amid worries about whether Beijing will keep its word over stabilising the yuan, IMF chief Christine Lagarde has urged China to communicate better with financial markets.
But China cannot carry the blame alone, say experts. Despite rapid growth it makes up only 13% of the world economy, notes Ha-Joon Chang, who teaches economics at Cambridge University. As of 2014, the US, the eurozone and Japan together accounted for nearly half of the world economy. “The rich world vastly overshadows China,” Chang says.
Is this a repeat of the 2008 crisis?
Speaking in Davos, billionaire speculator George Soros said: “There is a financial crisis and a bear market … The source of the disequilibrium is different. In 2008 it was US sub-prime housing. Today it is China, where a hard landing is practically unavoidable.” Others warn that the vast money-printing programmes by central banks known as quantitative easing have flooded markets with easy money and propped up asset prices while little has been done in the last seven years to address fundamental economic problems. Those analysts warn that big imbalances remain in the global economy, that the world’s banking system has not been reined in and national governments have made little progress in restructuring their economies towards more diverse sources of jobs and growth.
Should investors keep calm and carry on?
Yes, say other experts: the underlying economic data is not that weak and markets will soon stabilise. Emerging economies with dollar-denominated debts are certainly facing challenges as the US raises interest rates, but the outlook for the dominant developed economies looks better, they argue. Even Nouriel Roubini, the economist known as Dr Doom who predicted the last crash, told Davos: “It is not going to be like 2008-09. There is not the excessive leverage in the financial system that there was last time.”
Fears about China are also overdone, say others, including Steve Schwarzman, billionaire boss of the private equity firm Blackstone Group. “If I thought China was in a freefall I would be really concerned. I actually don’t. The consumer and the service economy is holding up pretty well in China,” Schwarzman told Bloomberg Television in Davos.