Stephen King might be leaving HSBC, but the bear is not departing without a bang.
The People’s Bank of China’s new policy of adjusting rates to prevent the yuan (renminbi) from moving up any further has ramification outside of the currency arena. According to Stephen King, Senior Economic Adviser to HSBC, China has been acting as a global economic “shock absorber” since 2007, and if it is no longer willing to play that role, then the global economy is likely in for a period of readjustment.
King highlights that, unfortunately, this readjustment seems likely to entail a notable strengthening of the dollar, with the corollary of "collapsing emerging market currencies" and even the specter of continuing deflation (or stagflation) in developed economies.
China as global "shock absorber"
The first point King makes is that the world would have faced a "far greater crisis" in 2007 and since then if China not been there to play the "shock absorber" role.
What if Chinese infrastructure investment had not skyrocketed multi-fold? Commodity prices would not have bounced back after the financial crisis and more than a few emerging nations would have found themselves short of revenues and even facing desperate balance of payments crises. Or what if the the yuan had not steadily appreciated? It would have been very difficult for the rest of the world to devalue, so monetary conditions would have been tighter and, therefore, global deflationary pressures would have been much stronger than we have seen so far.
Any way you slice it, China has been the "shock absorber for the global economy, a punch bag seemingly able to soak up the recessionary blows that would otherwise have totally derailed global growth." King provides series of charts that illustrate currency movements since the beginning of 2010. Versus the US dollar, the yuan has been stronger than all other major currencies including the Swiss franc. Keep in mind this means China has suffered a significant loss in price competitiveness over the last five years.
PBOC signals turnaround is fair play
King goes on to note that "China’s role as a “stabilizer” for the global economy has contributed to instability within China itself."
He argues that there have been significant costs to China for playing this shock absorber role. The nation's leaders now have to deal with a speculative, bubbly property market, a major increase in individual and government indebtedness, extremely volatile stock markets, a leveraged to the gills shadow banking system and a decrease in marginal rate of return on capital spending. From this perspective, the recent actions of the PBOC, which have been called both the start of a major devaluation and a slight market-based adjustment, might be more accurately perceived as an ongoing effort to move economic risks away from China and back to the rest of the world.
King ends with a warning
The key question that King poses, and that must be answered collectively by global leaders is who is going to pick up the slack now that China is looking to become more competitive. "It is easy to criticise China’s internal imbalances. Doing so without taking into account the role of those imbalances in stabilising the global economy is, however, a major mistake. It doubtless makes sense for China now to address its internal imbalances. Yet, in doing so, the rest of the world needs to find a new shock absorber. It’s not at all obvious whether any economy is really up to the task."