Chinese dragon is now the elephant in the global room

As a rollercoaster week on the financial markets comes to an end, we appear to be right back where we started, writes Kyran Fitzgerald.

At the end of a rollercoaster week on the financial markets — in which Armageddon and ‘Black Monday’ sparked endless discussion about a possible repeat of the Asian and Russian crises of 1998 and much talk of a Chinese implosion and a global recession — we appear to be more or less back where we started.

Calmer conditions had returned, but many seem in agreement that a nervous US Federal Reserve will postpone its long-awaited rate hike until December.

At times like these, the small guy is often the real sufferer, pulling his or her investments out of the market in a blind panic, realising losses that might otherwise have been merely temporary. Among the big victims have been the many thousands of small Chinese investors who couldn’t resist the chance for a flutter on the exchanges in Shanghai and Shenzen.

Their government has been left with egg on their collective face yet its decision to allow a devaluation in the national currency may reap benefits in the form of greater exports further down the line.

Unsurprisingly, the hardest hit stock markets outside China over the past fortnight were in the so-called emerging markets and in Germany. The end to the commodities boom, underway since the Millennium, has been called, while German exporters of high-end machinery and luxury goods face a slowdown in demand for now.

Ireland will take comfort from the fact that demand for so-called ‘soft’ commodities — foodstuffs, that is — should hold up much better, according to the experts. This may be cold comfort to heavily invested farmers faced with a recent weakening in prices for their output.

It is an ill wind that blows no good and the Monday meltdown left one day trader, a Japanese with the pseudonym, ‘CIS’ better off to the tune of $34m as a result of a decision to commit millions on a big gamble shorting the Tokyo stock market.

While being interviewed by Bloomberg, ‘CIS’ was spotted with a $1,600 bottle of Burgundy. He had surely earned his right to those happy few swigs. What was really impressive was that having banked $13m in paper profits by the close of business in Tokyo, ‘CIS’ kept building his position more than doubling his gains by the time Wall Street had pulled up the shutters. The trader is, no doubt, back at his post sating his gambler’s appetite, confident that he will never end up on the Boulevard of Broken Dreams.

Many other Asians are not so lucky. During periods of high drama, it is always amusing to contrast the behaviour of excited TV presenters and market players with the detached demeanor of the distinguished economists dragged before a microphone in order to provide the act with a bit of real class.

In his time, the great Canadian economist, JK Galbraith, used to deploy his air of amused contempt when confronted by news of the latest upswing, or downswing on Wall Street. In his day, the traders moved about in physical herds, jostling each other for space.

Nowadays, the physical noise may have abated, but markets appear to jerk one way or the other like puppets on invisible strings. Information has never seemed to be more freely available, yet trading has never appeared more opaque, dominated by electronic forces and institutional rules.

Last week, in the unavoidable absence of Professor Galbraith, the wisdom was provided by the Harvard University economist, Ken Rogoff, and by the Noble prize winning Robert Shiller of Yale. Professor Rogoff stuck his neck out in a brief interview in which he warned, on Wednesday, that there was now a “much higher chance of a hard landing in China”, adding that “it is hard to tell how sick the economy is due to the lack of transparency.” He covered his position by pointing to the ‘trillions’ of dollars of reserves available to the Chinese government.

Robert Shiller, meanwhile, pointed to the contrast between the continuing high level of asset prices in America, driven by low interest rates and the ongoing lack of real investment in productive capacity.

It is likely that the controlled devaluation of the Chinese currency, followed by falls in other Asian currencies, will spark another huge round of cut-price manufacturing which will only add to worldwide deflation in the price of goods. Policymakers need to get their head around how best to persuade businesses to invest in the type of capacity people really need instead of returning large sums to shareholders, pumping up executive rewards and pouring money into ever more lavish, ever more vertical, temples of commerce.

But, back to the events of the past fortnight. The future of the world’s second largest economy will continue to arouse huge interest.

The Chinese dragon is now the ‘elephant’ in the global room, so to speak. The big known ‘unknown’ is whether the Chinese communist leadership will give priority to the maintenance of full control over the task of ensuring that the country moves to the next great phase of its development.

The late leader of the People’s Republic, Deng Xiao Ping, used to say, apropos economic development, that as long as the cat caught the mice, it did not really matter how it went about it. Deng’s cats caught enough mice to lift hundreds of millions out of poverty and into the middle classes.

But where does the country go from here, now that it appears to have reached the end of the catch-up, high investment phase of development.

The leadership may be tempted to try and herd the cats after its latest experiment with stock market capitalism, but can China’s future really be trusted to a group of ageing Communist party apparatchiks and commercially-minded Generals with pudgy fingers in too many honey pots?


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