*PARIS: China is the last bulwark against a deep crisis in emergingeconomies going fully global, analysts say, although a prolonged trade warcould sap Beijing’s defences.*
Emerging countries — loosely defined as having fast growing but volatileeconomies — have seen their currencies battered in recent weeks, plungingtheir finances into turmoil, and raising fears of global contagion.
But China, the world’s second-biggest economy and itself categorized as anemerging 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 GuanQingyou, 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 ascentral banks across the world enter a cycle of tighter monetaryconditions, especially the powerful US Federal Reserve, cheap money willbecome scarce.
Higher US interest rates are “another nail in the coffin” for emergingcountries needing external financing, said Lukman Otunuga, a researchanalyst at FXTM.
A meltdown of the Turkish lira — somewhat stemmed by a recent massiveinterest rate rise — and the Argentinian peso are cases in point, as bothcountries have “exceptionally large current account deficits”, said OliverJones, markets economist at Capital Economics.
South Africa, Colombia and, to a lesser extent, India and Indonesia are insimilar danger of being trapped in Fed rate rise pain, he said.
But the currencies of Korea, Thailand and Malaysia have done much betterbecause of their close trade ties with Beijing and their healthier currentaccount positions.
* Strong reserves*
China itself still boasts a strong foreign reserve position and has takensteps to cut debt, both useful shields against global turmoil.
Read Top Stories
“Our foreign exchange reserves are still relatively high,” said Guan at theReality Institute. “In addition, China has already started the process ofdeleveraging after the end of 2016.”
But even if fundamentals are still holding up, only the very brave darepredict how damaging ongoing trade tensions with the United States will beto China’s position.
Recent tentative signs of improving relations between Washington andBeijing have lifted investor spirits, but the threat of the US imposingfresh 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 “measurableimpact on growth in China” and “trigger vulnerabilities” among its Asianneighbours.
While her staff did not yet see contagion spreading beyond the countriescurrently fighting investor flight, the escalating US-China trade spatcould 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 worldwidemeltdown, 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,” saidHolger Schmieding, an analyst with Berenberg.
“Some other emerging markets are in trouble. Fortunately, they are simplynot big enough to cause a big new global crisis.”
