Beijing is one of the causes of global market instability
THE foreign-exchange market has been quite volatile lately.
Within the last couple weeks, the baht, which had stayed around 35 against the US dollar, depreciated by 3 per cent to reach its weakest value of the year, above 36, on just soft-landing Chinese trade data and near-to-the-ground commodity prices.
Afterwards, with only a small weakening in US data and a rebound in commodity prices, regional buyback flows moved the baht back to 35 within less than a week.
To the forex market, those two moves reflected almost 20-per-cent volatility per year, which is unusually large at four times regular dispersion in the baht.
Should we care? And what should we do about it?
In fact, if we read the news carefully, we will find that the fundamental problems of the current economic situation are linked to the aftermath of the commodity boom. Needless to say, it comes from the slowdown in China’s manufacturing, and it is not just a cyclical phenomenon.
In China, the growth component is changing. The structural reforms Beijing has implemented to lessen imports lead not only to a weakening in demand for products but also to a downswing in output prices from the oversupply situation for some products.
China might not make a quick comeback to being a hyper-growth country. Its product prices might not pick up if it continues producing the same supply level when the world market is slowing. In other words, a slower China is the real deal.
Does China care about its slowdown? The data say no.
Low unemployment, around 4 per cent, in China might allow it to perform structuring transformation without thinking of a jobless backlash. Yes, low output prices annoy the Chinese. Their economy is really big and can live in a deflationary period longer than anyone can think of.
If China doesn’t care, then who does?
Sorry to say, but it looks like some commodity exporters might not be able to survive in this low-commodity-price period.
The obvious example is Brazil, where fuel, mineral products and metals account for around 30 per cent of total exports.
Guess what Brazil’s top export destination is?
Checkmate! It’s China.
As a consequence, Brazilian’s currency the real, which once traded around 2.6 against the dollar, depreciated to the weakest level of 4.1, almost 60 per cent in less than a year.
Negative growth, lower prices and lower currency value have combined to cause Standard & Poor’s to downgrade Brazil’s country rating to junk, “BB-plus”.
This event sinks confidence in all oil-related economies and pushes the currencies of emerging markets below their fundamental level.
Can anybody help raise commodity prices or the world economy?
Recently Russia, instead of just waiting to see the commodity downtrend coming against its economy, became involved in the Syrian civil war to roil energy markets.
Bombs are being dropped and the fear now is that Russia will be a more active and permanent participant in the Middle East.
This will further raise demand for oil, as we can see. The price of West Texas Intermediate crude briefly rose back to US$50 per barrel from around the lowest level of $40.
Suppose the Russian operation is just a beginning and the oil price might not go down further.
The huge shake-up in the currency prices in the last couple of weeks might very well be a warning for capital outflows.
Is this the time when emerging-market currencies should make a positive comeback?
Perhaps not yet.
Well, one wound stops bleeding but stronger growth without China’s industrial gluttony is quite invisible for those relying heavily on the global economy.
A self-sufficient economy might be a way to survive but only a small number of economies can forget China, start adopting that vigorous concept and improve their own demand in the near term. It might need five or more years to rebuild a firm base.
The global growth puzzle is surely huge and hard to solve.
What choices are left for the global economy, or, smaller than that, Thailand?
Do we have a way to improve economic conditions without Chinese growth?
Actually, I do really think there is one key global trend that could let our economy pass through this high volatility, low commodity prices and currency devaluation.
Let me introduce you to my hero … next month!
Jitipol Puksamatanan, a capital-market economist at TMB Analytics, the economic analysis unit of TMB Bank, can be reached at [email protected].
