PARIS: China is the last bulwark against a deep crisis in emerging economies going fully global, analysts say, although a prolonged trade war could sap Beijing’s defenses.
Emerging countries — loosely defined as having fast growing but volatile economies — have seen their currencies battered in recent weeks, plunging their finances into turmoil, and raising fears of global contagion.
But China, the world’s second-biggest economy and itself categorized as an emerging 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 Guan Qingyou, chief economist at China’s Rushi Advanced Institute of Finance.
“China’s ability to resist risk is relatively strong.”
Current account deficits must be financed with foreign currencies, and as central banks across the world enter a cycle of tighter monetary conditions, especially the powerful US Federal Reserve, cheap money will become scarce.
Higher US interest rates are “another nail in the coffin” for emerging countries needing external financing, said Lukman Otunuga, a research analyst at FXTM.
A meltdown of the Turkish lira — somewhat stemmed by a recent massive interest rate rise — and the Argentinian peso are cases in point, as both countries have “exceptionally large current account deficits,” said Oliver Jones, markets economist at Capital Economics.
South Africa, Colombia and, to a lesser extent, India and Indonesia are in similar danger of being trapped in Fed rate rise pain, he said.
But the currencies of Korea, Thailand and Malaysia have done much better because of their close trade ties with Beijing and their healthier current account positions.
China itself still boasts a strong foreign reserve position and has taken steps to cut debt, both useful shields against global turmoil.
“Our foreign exchange reserves are still relatively high,” said Guan at the Reality Institute. “In addition, China has already started the process of deleveraging after the end of 2016.”
But even if fundamentals are still holding up, only the very brave dare predict how damaging ongoing trade tensions with the United States will be to China’s position.
Recent tentative signs of improving relations between Washington and Beijing have lifted investor spirits, but the threat of the US imposing fresh tariffs on Chinese imports worth $200 billion still looms large.
Christine Lagarde, managing director of the International Monetary Fund, warned recently that higher US-China tariffs would have a “measurable impact on growth in China” and “trigger vulnerabilities” among its Asian neighbors.
While her staff did not yet see contagion spreading beyond the countries currently fighting investor flight, the escalating US-China trade spat could 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 worldwide meltdown, 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,” said Holger Schmieding, an analyst with Berenberg.
“Some other emerging markets are in trouble. Fortunately, they are simply not big enough to cause a big new global crisis.”
Resilient China is firewall in emerging currency crisis
Resilient China is firewall in emerging currency crisis
- Emerging countries — loosely defined as having fast growing but volatile economies — have seen their currencies battered in recent weeks
- China, the world’s second-biggest economy and itself categorized as an emerging market, doesn’t share a key downside of the worst-hit countries
G7 countries to release oil reserves as IEA agrees to largest ever market intervention
- IEA recommends release of 400 million barrels
RIYADH: Germany, Japan and Austria will release part of their oil reserves after the International Energy Agency recommended the release of 400 million barrels of oil from stockpiles, the largest such move in IEA history.
In a statement, IEA Executive Director Fatih Birol said the flow of oil, gas and other commodities through the Strait of Hormuz have all but stopped, leading global energy supply to fall by around 20 percent.
Ahead of the confirmation of the move — a larger intervention than the 182.7 million barrels that were released in 2022 by in response to Russia’s invasion of Ukraine — several countries began setting out plans to bring their reserves into play as countries grapple with soaring crude prices amid the US-Israeli war with Iran.
Birol said: “I can now announce that IEA countries have decided to launch the largest ever release of emergency oil stocks in our agency's history.
“IEA countries will be making 400 million barrels of oil available to the market to offset the supply lost through the effective closure of the strait.
“This is a major action aiming to alleviate the immediate impacts of the disruption in markets.”
Germany’s Economy Minister Katherina Reiche confirmed on Wednesday her government plans to limit petrol price increases at filling stations to once a day and to introduce more stringent antitrust regulation of the sector.
She did not give an exact timing for those measures, but added that the US and Japan would be the largest contributors to the release of the oil reserves.
The US has not confirmed it would do so, but its Interior Secretary Doug Burgum told Fox News on Wednesday that “these are the kinds of moments that these reserves are used for.”
The announcements did not stop oil prices rising, with Brent crude up 3.26 percent to $90.66 a barrel at 4:29 p.m Saudi time, and West Texas Intermediate up 3.12 percent to $86.05. Both were some way below the $119 a barrel seen earlier in the week.
“The situation regarding oil supplies is tense, as the Strait of Hormuz is currently virtually impassable,” Germany’s Reiche said.
“We will comply with this request and contribute our share, because Germany stands behind the IEA’s most important principle: mutual solidarity,” Reiche said about the IEA’s request.
According to a statement by Reiche’s ministry, Germany will contribute 2.64 million tonnes of oil. This corresponds to 19.51 million barrels.
Reiche stressed there was no supply shortage in the country, which has a legally mandated reserve of oil and oil products intended to cover 90 days’ demand.
South Korea will release 22.46 million barrels of oil, which represents 5.6 percent of the total IEA ask, the country's industry ministry said.
“The government will consult with the IEA secretariat on details, such as the timing and amount, from the perspective of national interests in accordance with domestic conditions,” the ministry said in a statement.
The ministry said it would continue to coordinate closely with major countries in responding to high oil prices to minimise any domestic impact.
Austrian Economy Minister Wolfgang Hattmannsdorfer said his country was releasing part of the emergency oil reserve and extending the national strategic gas reserve, adding: “One thing is clear: in a crisis, there must be no crisis winners at the expense of commuters and businesses.”
Acting ahead of the IEA move, G7 member Japan announced plans to release 15 days' worth of private-sector oil reserves and one month's worth of state oil reserves.
“Rather than wait for formal IEA approval of a coordinated international reserve release, Japan will act first to ease global energy market supply and demand, releasing reserves as early as the 16th of this month,” Prime Minister Sanae Takaichi said in a broadcast statement.
Following a meeting with the IEA on Wednesday, G7 energy ministers said: “In principle, we support the implementation of proactive measures to address the situation, including the use of strategic reserves.”
All IEA member countries are required to keep 90 days’ worth of their nation’s oil use in reserve in case of global disruption.
