OECD reduced its global growth forecast for 2024 by two tenths from its June estimate to 2.7%; below its 3% projection for 2023, and blamed some of this on China. 

There’s understandable nerves amongst G10 policymakers, and within the financial markets, about the slowdown in China. The OECD reduced its global growth forecast for 2024 by two tenths from its June estimate to 2.7%; below its 3% projection for 2023, and blamed some of this on China. It also sought to show the vulnerability of the global economy by suggesting that a surprise three percentage point drop in China’s domestic demand would reduce by global growth 0.6% points. With these warnings, it seems justified to be very afraid of China’s impact– or is it?

Many have commentated in the past about the similarities between China now and the post-boom Japanese economy after the stock market and real estate bubbles burst in the early 1990s. But it is worth remembering, for those of us that are old enough, that there were similar fears voiced about Japan’s detrimental impact on the global economy when it started to struggle from the 1990s. But these fears never materialised.

For instance, fears that the country would experience a debilitating debt crisis that would cascade across the world never happened. It is no wonder that the short-JGB trade became arguably the greatest so-called “widow-maker” trade of all. The reason that Japan never had the problem many feared was that Japan owed the money to itself; not to others and not in a foreign currency. China is the same. But while this might be one observation that supports the idea that China can crumble without the depth of global spillover effects feared, we do have to point out some of the differences between China today and Japan in the 1990s.

One of these is that Japan never tried to make the yen into a truly international currency that might, one day, rival the dollar. We view this as important because China does seem to have this sort of aim and that’s likely to have a bearing on its currency policy today relative to Japan’s in the 1990s.

In Japan’s case, the fact that policymakers never really sought a global role for the yen is reflected in the fact that the proportion of global foreign exchange turned over daily in yen was 17% of the total in the last BIS survey in 2022. Back in 1989 it was 28%. The amount of international lending carried out in the yen has risen by just 14% since 2000 while, in that time, international lending in the dollar has risen more than fivefold.

So, we can see that Japan has pretty much gone backwards when it comes to internationalisation of the yen, but greater global currency acceptance was never the aim anyway. And what this allowed Japan to do was to seek some relief from its economic problems by creating an environment for yen weakness. This it did most aggressively through the 1990s by intervention; in particular, cajoling the US administration into supporting this intervention effort.

The result is that the real effective value of the yen declined substantially and, in the Standard Bank’ view, this helped cushion the economy against the difficulties created by the post-bubble economy. The question now is whether China will do the same if, indeed, it undergoes a similar post-bubble experience to Japan in the 1990s and beyond. It would seem not, if only because China wants to promote the renminbi as an international currency and that means creating a certain degree of stability and strength in the currency, in addition to all those other factors that go into increasing the international use of the currency.

Mr. Steve Barrow, Head of Standard Bank G10 Strateg, said the recent fall in the renminbi’s trade-weighted index would be the start of a similar slide to that we saw in the yen in the post-bubble period. But he suspects that the authorities will fight to avoid this happening and will have some success in doing so. But then the question for policymakers outside of China is whether this prevention of, perhaps, a necessary slide in the currency just makes the country’s problems worse and, in doing so, actually increases the adverse spillover effects to other countries.