China is the last bulwark against a deep crisis in emerging economies going fully global, analysts say, although a prolonged trade war could sap Beijing’s defences.
Emerging countries — loosely defined as having fast growing but volatile economies — have seen their currencies battered in recent weeks, plunging their finances into turmoil, and raising fears of global contagion.
But China, the world’s second-biggest economy and itself categorized as an emerging market, doesn’t share a key downside of the worst-hit countries: their rampant current account deficits.
“The possibility of a currency crisis in China is unlikely,” said Guan Qingyou, chief economist at China’s Rushi Advanced Institute of Finance.
“China’s ability to resist risk is relatively strong.”
– ‘Nail in coffin’ –
Current account deficits must be financed with foreign currencies, and as central banks across the world enter a cycle of tighter monetary conditions, especially the powerful US Federal Reserve, cheap money will become scarce.
Higher US interest rates are “another nail in the coffin” for emerging countries needing external financing, said Lukman Otunuga, a research analyst at FXTM.
A meltdown of the Turkish lira — somewhat stemmed by a recent massive interest rate rise — and the Argentinian peso are cases in point, as both countries have “exceptionally large current account deficits”, said Oliver Jones, markets economist at Capital Economics.
South Africa, Colombia and, to a lesser extent, India and Indonesia are in similar danger of being trapped in Fed rate rise pain, he said.
But the currencies of Korea, Thailand and Malaysia have done much better because of their close trade ties with Beijing and their healthier current account positions.
– Strong reserves –
China itself still boasts a strong foreign reserve position and has taken steps to cut debt, both useful shields against global turmoil.
“Our foreign exchange reserves are still relatively high,” said Guan at the Reality Institute. “In addition, China has already started the process of deleveraging after the end of 2016.”
But even if fundamentals are still holding up, only the very brave dare predict how damaging ongoing trade tensions with the United States will be to China’s position.
Recent tentative signs of improving relations between Washington and Beijing have lifted investor spirits, but the threat of the US imposing fresh tariffs on Chinese imports worth $200 billion still looms large.
– Trade ‘shock’ –
Christine Lagarde, managing director of the International Monetary Fund, warned recently that higher US-China tariffs would have a “measurable impact on growth in China” and “trigger vulnerabilities” among its Asian neighbours.
While her staff did not yet see contagion spreading beyond the countries currently fighting investor flight, the escalating US-China trade spat could deliver a “shock” to emerging markets, she told the Financial Times
But in the meantime, said Joydeep Mukherji, an analyst with S & P Global, said “we are not forecasting a major crisis in emerging markets”.
Perhaps inspired by the 10th anniversary of the global financial crisis, economists have started to wonder whether there could be another worldwide meltdown, this time triggered by highly-indebted emerging countries.
For now, the answer appears to be no.
“China can still cope with its debt due to its high savings rate,” said Holger Schmieding, an analyst with Berenberg.
“Some other emerging markets are in trouble. Fortunately, they are simply not big enough to cause a big new global crisis.”