Yuan devaluation breaks last line of global economic defence - HSBC's Stephen King
China’s devaluation of the yuan reveals that the global economy will be without stabilisers if another crisis strikes, economists have warned.
The decision to cut the yuan’s value showed that Beijing had become scared, they said, suggesting that the world’s second-largest economy is in a far more precarious position than outsiders had assumed.
Stephen King, a senior economic adviser to HSBC, said that since the crisis China had done more than any other to provide “the heavy lifting to support global economic growth”, but that it may not step in to keep the world’s financial system afloat again.
His comments came as leading ratings agency Moody’s singled out the prospect of a Chinese hard landing as one of the biggest risks to global growth this year.
A sharp correction in Chinese stocks - shaving up to 32pc from the value of equities traded on its largest index - was indicative of the country’s economic slowdown, it said.
Moody’s expects China’s GDP to rise by just 6.8pc this year, after years of growth in excess of 7pc. The agency expects growth to slow to 6pc a year by the end of the decade and that the slowdown will only be managed “thanks to significant policy support”.
An unexpected move last week by the People’s Bank of China (PBoC) to devalue the yuan - also known as the renminbi - unnerved financial markets and analysts alike, some of whom have suggested that policymakers are hoping to stabilise growth with an export-led push.
Already the range and size of measures introduced by Beijing “has been broader and larger than we expected”, Moody’s said, suggesting that China “is weaker than we previously assessed”.
The ratings agency said that the central bank’s actions had “added concerns about what it may portend for China’s economic growth”.
Acting as the global stabiliser had left China “battered and bruised”, claimed Mr King, formerly HSBC's chief economist. Despite faltering global demand and the weakness for exports which that entailed, China allowed its currency to appreciate tremendously after the crisis.
China acted as a “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”, Mr King said. China’s stabilising actions have led to an overheated property market, a build-up in debt, and a roller coaster ride for the stock market.
Now it appears to have abandoned its role and taken tentative steps into the arena of “currency wars”.
As Japanese and European central banks have weakened their own currencies, they have raised the cost of imports and fended off damaging deflation.
Mr King said: “To the extent that a weaker yen and euro imply a stronger renminbi, it looks as though the world economy has been engaged in a game of deflationary pass-the-parcel.
“The country that finally gets to unwrap the prize is the loser, not the winner.”