The global economy is losing its last shock absorber
Last week's surprise devaluation of the Chinese currency, the yuan, has brought the world's second-biggest economy into focus, and it's not a pretty picture.
Growth is slowing, inflation is very low, the country's demographics mean its workforce will soon stop growing. It has also failed to put a stop to its considerable debt accumulation in recent years.
But according to Stephen King, outgoing chief economist at HSBC, that way of telling the story ignores China's role as the heavy-lifter in the global recovery - the economy that's been able to take a beating on behalf of the rest of the world.
King calls China "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."
In inflation-adjusted terms, no other major currency has come close to the Chinese yuan in terms of appreciation against the dollar since 2010.
Here's how it looks:
King notes that without that surge in the exchange value of the yuan (or renminbi), other countries' economic policy would have been tighter by definition. For example, a weaker euro to the yuan will boost French and German exporters at the expense of Chinese exporters, which will immediately find it more difficult to sell goods in the European market.
He goes on to say that colossal Chinese investment - and debt accumulation - helped to prop up commodity prices.That's left China with a pretty massive fiscal deficit, which the IMF says is worth nearly 10% of GDP when including off-budget items (see the chart to the right), but without taking that hit, King says that "many emerging nations would have found themselves short of export revenues and, in some cases, would have been faced with immediate balance of payments crises."
That's left China with absolutely colossal wasteful debt, but may still have had positive effects for the rest of the world. Here's King:
China's role as a "stabiliser" for the global economy has contributed to instability within China itself. Yes, the global economy has done better as a consequence of China's behaviour but, for China, there have been significant costs: an overheated property market, a substantial increase in indebtedness, a roller-coaster ride for the stock market, a highly leveraged shadow banking system and a declining marginal rate of return on capital spending...
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.
King takes a look at the case that the US economy can act as a shock absorber for the world, but argues that growth has been moderate, rather than spectacular. What's more, massive appreciation of the dollar could cause American growth to fizzle out.
And if Europe and Japan are both still definitely in easing cycles, with more rather than less quantitative easing quite possible from both in the years ahead, there doesn't seem to be an obvious shock observer anywhere on the horizon.