Victor Arganov, analyst at International Investment Broker, EXANTE on China’s growing power. Is a digital yuan next?
Modern China is the world’s largest exporter of goods and the world’s second-largest exporter of services. Prior to 2015, it also showed the world’s highest GDP growth rate: 10 per cent per year. In 2019, China’s economic growth slowed down to the level of 1990 due to a trade war with the US, but still it remained exceptional by Western standards: 6.1 per cent per year. The current coronavirus outbreak threatens to make matters worse in China, but also jeopardises the operation of the world’s largest corporations that own production facilities in the affected zone. This is yet another proof of China’s role in the modern world.
The US and China are the world’s largest economies. This status inevitably leads to an enormous influence on the rest of the world. In America’s case, this influence is as obvious as it can possibly get. All continents use the US dollar as a backup currency, and crises in the US cause crises in other countries as well (2008 is an obvious example). Many people underestimate China’s impact on the world, but it is already comparable to that of the US. The recent trade war between China and the US is great evidence for this. It showed how much various markets of the world, such as the stockmarket and the raw materials market, are impacted by even the most minor changes in relations between China and other countries. The coronavirus outbreak can potentially cause much more damage than the import tariff war.
In late January 2020, when the first phase of the trade agreement had already been signed and the “ceasefire” with the US had already started, China once more became a source of concern. The coronavirus outbreak led to the quarantine of production facilities owned by Johnson&Johnson, Samsung, and Foxconn (a company associated with Apple) near Wuhan. That alone was enough to threaten the iPhone SE 2 world premiere planned for March, as well as the launch for a number of other products. Many other companies from other sectors of the economy also suffered financial losses, such as the Starbucks coffee chain.
It is remarkable enough that a quarantine around a single city in China can delay Apple’s release of a new smartphone, and if the quarantine continues, it will seriously hinder Apple’s production and greatly damage the company’s position on the global market.
This example may show the impact on China on the global business much more clearly than the index values alone. And if the epidemic is not curbed soon, many companies, such as transportation, food, and engineering companies, are going to have serious problems. Even American indices are very likely to plummet to their worst trade war values after their short-lived triumph.
Even with its current annual GDP growth of 6 per cent China remains an extremely powerful driver of global economic growth, and can very well overtake the US in 10 years. Chinese yuan could overtake the dollar eventually in our digital age. That is just an optimistic prediction that assumes a quick victory over the coronavirus. If, however, the epidemic drags on, China’s economic growth may slow down even further, but other countries, including the US, are also going to take a massive hit.
China, the Trade War, and the Stock Market
In the first years of Donald Trump’s presidency the American economy showed remarkable growth. From December 2016 to September 2018 the S&P500 index (the 500 leading companies of the US) increased by 30 per cent, setting the new record at 2930.
However, in October 2018 the indices started to go down due to the trade war with China. By the end of December S&P500 dropped by 16 per cent, returning to its mid-2017 level. Negotiations helped the indices to regain their standings by April 2019, but new import tariffs and the stalling of the negotiations led to another drop. The Federal Reserve’s intervention as it lowered the key interest rate from 2.5 per cent to 1.75 per cent and flooded the market with “cheap” money was probably the only thing that saved the US from a major recession. In the fall and the early winter the American indices set new historical records (for example, S&P500 rose above 3200), but they started to go down again due to the coronavirus outbreak in China.
The “peaceful” countries have also suffered from the conflict between the US and China, sometimes even more so. For instance, the main British index, FTSE 100, set a new historical record of 7779 in May 2018, but dropped by 14 per cent to 6721 by December, and hasn’t regained its position since. Currently it is sitting at around 7500.
Digital Yuan: Is China Going to Become the New Leading Superpower?
The above examples show the strength of China’s influence on the modern economy. Although China is just one of the world’s many countries (even if it’s the most populous one), major events affecting China (both political and force major events) can have disproportionate impact on investors and the markets: they can cut oil and bitcoin exchange rates in half, upset the production plans for the world’s largest corporations, and so on. And in addition to all that, China works hard to increase its influence even further, such as by developing the digital yuan, which could potentially become one of 2 or 3 of the world’s leading national cryptocurrencies.
China has enormous industrial and information resources at its disposal in its push for world domination. The Huawei corporation that took a hit from sanctions by the US has recently entered into open cooperation with the Chinese government in developing the digital yuan. The tremendous computing power at the hands of the country’s crypto mining companies can also be redirected to serve the government’s needs.
It is also possible that China’s generous position in the trade war with the US and its willingness to make major concessions in the first phase of the trade agreement is just China intentionally playing weak so that it doesn’t have to show its strength too early.