The traditional new year hangover has resulted in rather more headaches than usual this year.
Global stock markets are already down 11 per cent as a heady cocktail of woes have punctured any semblance of optimism for 2016. But despite the messy sell-off, it is not entirely clear exactly what investors are so worried about.
Much of the blame can seemingly be laid at the door of China, a country whose main gift to the world appears to have morphed from manufactured goods to morose pessimism.
Certainly the Chinese authorities have spent the first few weeks of the year undermining the sheen of competence that made them respected, if not loved, across much of the planet. But has anything really changed in the Middle Kingdom?
Doom mongers point to the renminbi’s 1.3 per cent slide against the dollar since the turn of the year, not a vast move in forex terms but virtual freefall for the once tightly managed redback, as a sign of the pressures China is under.
The only problem is that it tells us nothing. The People’s Bank of China told us in December that it was switching from managing the renminbi against the dollar to measuring it against a basket of 13 currencies.
The fact that this new basket arrangement was indexed at 100 as of December 31 2014 (not 2015) gave us an additional insight into the thinking of the bank, and by extension the government.
Since then the renminbi has cleaved closely to this 100 level, and now sits at 100.39. Shock horror, the Chinese have done what they told us they were going to do.
What’s more, this makes eminent sense. Why would any large manufacturing exporter choose to peg its currency irrevocably to the dollar at a time when the greenback is appreciating wildly?
The ructions in China’s equity market have been more spectacular. Amid often chaotic scenes, share prices have fallen 16.5 per cent so far this year.
But surely everyone knew the Chinese equity market was overvalued; prices should have returned to earth after the country’s stock market bubble burst in July 2015, but were prevented from doing so by massive buying by China’s “national team”, a coalition of state-owned institutions corralled into action by the government.
Moreover, the global fallout is rather limited, with just 2 per cent of the Chinese equity market owned by foreign investors.
Others have fixated on the reduction in China’s foreign exchange reserves, down $700bn since June 2014, to $3.3tn. This decline is partly due to valuation factors (its euro and yen holdings are now worth less in dollars) and partly due to capital outflows.
But China still has plenty of firepower at its disposal. And, given that Beijing’s vast reserve stockpile — much of which was invested in US Treasuries, pushing American interest rates to unnatural lows — was cited as one of the imbalances behind the global financial crisis, surely it is good news if this stockpile erodes?
The renewed slide in oil prices below the $30 a barrel mark has also encouraged bearishness. But it is driven by rising supply, not falling demand (even poor old China reported record crude imports in December, smashing its previous monthly record by 8 per cent), so should, on balance, be a good thing.
Oil consumers typically have a higher marginal propensity to consume than oil producers, (think Norway and the Gulf states with their vast nest eggs) so lower prices should bolster global growth.
Weak commodity prices in general are often used as a stick to beat emerging markets, but 65 per cent of these countries are net commodity importers. So while the impact varies dramaticallyfrom country to country, there should be at least as many winners as losers.
Others still fret about a slowdown in global trade. The Baltic Dry index, which measures the cost of shipping raw materials, has fallen to its lowest level since inception in 1985. Capesize vessels that cost $20,000 a day to charter as recently as August can now be secured for $5,000.
This, admittedly, is not a bullish sign, but it probably has as much to do with an oversupply of vessels as falling demand.
And the naysayers are missing an important point, enunciated by Steve Howard, sustainability chief of Ikea, the Swedish furniture retailer, last week, when he said the West had probably hit “ peak stuff”.
In 2014, for the first time since records began (and almost certainly for the first time in human history) services, rather than physical goods, accounted for the bulk of growth in global trade. This will not be a one-off.
Shipowners may be up the proverbial creek, but the global economy has a lot more life in it yet.
Steve Johnson is deputy editor of the FT’s EM Squared
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