Could devaluation of China's yuan trigger the next financial crisis? | Larry Elliott


Every now and then, August belies its reputation as a sleepy month when nothing happens and throws up an event that shakes financial markets.

The Latin American debt crisis began in August 1982; oil prices soared after Iraq invaded Kuwait in August 1990; the Asian debt crisis had its genesis in the same month in Thailand seven years later. Then there are the crises that simmer away in August and finally come to the boil in September: the buildup to Black Wednesday in 1990; the weeks leading up to the collapse of Lehman Brothers in 2008.

This year, those looking around in August for ill omens for the global economy are spoilt for choice. There’s the fact that in the United States the president is at loggerheads with the man running the central bank. There’s the possibility of a general election in Italy that will produce an extreme hard-right government that will shake the foundations of the eurozone. There is, of course, the risk of a no-deal Brexit.

And then there’s China, which, at the sharp end of Donald Trump’s protectionist trade policy, is also struggling to cope with the escalating political unrest in Hong Kong and suffering from a more rapid slowdown than official figures would suggest.

Trump’s tweets claiming that companies and capital are leaving the world’s second biggest economy tend to be dismissed as mere White House bombast. But a look under the bonnet of the Chinese economy suggest there is some truth in what the US president is saying.

Two recent developments are of note. The first is the decision in late May by the People’s Bank of China to take over Baoshang Bank. Although the central bank’s deposit guarantee avoided a bank run, the bailout did not prevent serious tensions in the interbank market – rekindling memories of how the unwillingness of western banks to lend to one another was a key feature of the global financial crisis of 2008.

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The second development involves Evergrande, China’s biggest property company, which expanded as a result of the cheap money it could obtain from the country’s shadow banking system. But since 2018, shadow banking has been reined in on the direct instruction of China’s president Xi Jinping and property companies have been borrowing offshore in US dollars.

All of which makes the decision of Beijing earlier this month to allow the yuan to fall below seven to the dollar so interesting. All debt crises need a trigger to set them off, and this might just be it, since a devaluing currency makes it more expensive to pay back debts denominated in foreign currencies. And when your debts are as big as China’s, that’s potentially a very big deal.

Saudi Aramco’s partial lifting of the veil

The veil of secrecy surrounding the world’s most profitable company was lifted when Saudi Aramco held a results briefing for the first time. Well, not quite.

For a start, while investors were allowed to ask questions, the journalists listening in were not. And the first couple of questions – “Why are you so profitable?” and “How do you manage to be so environmentally friendly?” – were not exactly of the hardball variety.

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Indeed, the fact that the two non-questions were asked by JP Morgan and Morgan Stanley – both central to Saudi Aramco’s plan for a massive share flotation – might lead a cynic to think they had been planted.

When it comes, the initial public offering might value the company at as much as $2tn, and will allow the company to step up a diversification out of oil production without which it will not be the world’s most profitable company for much longer.

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The question that should have been asked, but wasn’t, is this: what, given growing pressure on governments to tackle global heating, are the chances of Saudi Aramco still being a going concern by the midpoint of this century?



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