World Chinese rush: plunge in stock markets, rising dollar and dropping ruble
Slowdown of Tianxia economy made all the world markets panic.
The first working day in Russia started with dropping prices on oil, rising US dollar and the collapse of Moscow Interbank Currency Exchange (MICEX). While all country was eating Olivier salad, the collapse in quotations in US stock market beat the record for the last 119 years — business index Dow Jones lost 1079 points. Obviously, it's China's fault. In fact, from the very first days world economy is trembling from Tianxia's troubles. Great Chinese Slowdown of economic growth rate has led to a series of side-effects. The main one, according to an economic observer of online media Realnoe Vremya Albert Bikbov, is that already low oil prices continue to fall.
Russia is resting – the world is burning
Russians are coming back to work after 10-day holiday – at 11.30 MSC, MICEX Index fell 2.87 percent from Wednesday closing level to a value of 1698, RTS Index fell 4 percent to 707, having changed the minimum of 623 since 17 December 2014.
After the holiday the ruble started exchange trades at the minimum of December 2014 – the dollar at 'tomorrow' calculations at Moscow Exchange got to 76.49. At 11.44 MSC it was traded near 75.66 rubles, 1.2 percent higher than by the close on 6 January.
At 11.44 MSC the euro was valued at 82.37 rubles that is 2.2 percent higher than by the previous close when it was 83.98.
While all people around Russia were resting – world foreign exchange and currency stocks and commodity markets at the first week of the year were literally trembling. So, the collapse of quotations became the biggest one for US stock market for the last 119 years. Billionaires from the list of 400 richest people in the world lost $ 194 billion during the decline in world stock markets caused by the collapse of stock exchanges in USA and China and by falling oil prices. That fact made most business leaders (including famous George Soros) fear of the global financial crisis 2008 repeat. For the first week of 2016 Dow Jones Index – the main business index in the USA – fell almost more than 5 percent.
But the main fire was in China.
Chinese fire
Last Friday trades on the mainland China stock exchanges were suspended in less than half an hour after opening because of a sharp decline in quotations. Shanghai Composite Index, showing the situation on Shanghai Stock Exchange, lost 7.32 percent. Shenzhen Component Index, the main index of stocks that are traded at the Shenzhen Stock Exchange, fell on 8.35 percent. The reason for panic among investors was Chinese currency official exchange rate depreciation by the Central Bank of Russia to the minimum of August of the previous year to a value of 6.5646 yuan per dollar.
Beijing is continuing to spend a lof of money on maintenance of stock market and yuan exchange rate stability. But it doesn't help China to escape from January fire that has increased reliable assets such as the yen, the euro and the gold in demand. At the end of December gold and foreign exchange reserves of the People's Bank of China decreased b record-breaking $ 107.9 billion, putting the total to the minimum of the previous three years ($ 3.33 trillion). Over the past year, reserves decreased by $ 512 billion, that is also the most serious collapse for all history of their existence.
It's hard to overestimate the influence on the whole world of the second global economy. China is the second largest consumer of commodities. And its consumption started to decrease: from January to November Tianxia import decreased by 15.1 percent, purchasing of European goods and services decreased by 14.1 percent, Japanese – 12.5 percent, Russian – 20.6 percent. Almost all trading partners have suffered, and the yuan devaluation indicates that the situation in 2016 can worsen.
And if China feedstock falls in demand — oil is rapidly becoming cheaper on world markets.
Fallen oil
Barrel of Brent oil at 11.44 MSK is valued $ 32.76, which is 2.35 percent lower than by Friday close, and current levels are close to the minimum values since April 2004.
Oil supply on the world market still outstrips demand because of shale oil production boom in the USA after OPEC decision to keep a current quota on the extraction of raw materials at the record-breaking levels, in spite of oil glut.
Most market analysts believe that the global oil glut will only get worse this year because of production growth in Saudi Arabia and Russia.
Oversupply of raw materials will continue to worsen as soon as Iran will return to the world oil market at the beginning of the next year after the lifting of Western sanctions. Analysts predict that the country can quickly develop the production to a level of 500 000 barrels per day, increasing the oil glut of the market, which has brought down prices. Customers have already lined up for the Iranian oil, especially in Europe.
There's also an 'economic war' between Riyadh and Tehran, which puts additional pressure on quotations. As it turned out, Saudi Arabia has dramatically brought down the oil price for its European customers a week ago, in order to complicate the entry to the market of Iran, tensions with which have increased recently. Earlier this week, Saudi Arabia and some of its allies have severed diplomatic relations with Iran in a protest against the execution of Shiite preacher by Sunni kingdom authorities.
The previous day, the US Energy Information Administration reported that the overall level of crude oil inventories fell by 5.1 million barrels last week. However, gasoline inventories in USrose sharply last week (by 10.6 million barrels), that increased fears over a slowdown in demand for oil products.
The overall level of crude oil inventories in the United States amounted to 482.3 million barrels last week, remained near the maximum for this time in last 80 years.
And the reason is the Great Chinese Slowdown (decline in economic growth less than 7 percent per year).
Chinese growth has run out of steam
In spite of focusing on innovation and technology, Chinese growth is based on the assimilation of existing technologies and rapid investments, rather than on creative destruction. An important aspect of the economic situation is the fact that property rights in China is still not adequately protected. Some businessmen' property are taken away from time to time. Most of the businessmen feel secure, but one of the reason is that they have the support of local party organizations and the CPC ruling establishment in Beijing. Labor mobility is strictly regulated, and the basic property right — the right to sell their own labor at their own discretion – is still not fully complied.
Chen Yun, one of the closest allies of Deng Xiaoping and the alleged architect of the market reforms at their initial stage, summarized the views of the majority of the party cadres about economy, likening her with 'a bird in a cage':
'An economy — is a bird, and party control over it — a cage, it is designed to ensure that a bird is healthy and well-groomed. But you shouldn't open the cage, otherwise, the bird will fly away.'
Because of the party control over economic institutions, the possibilities of creative destruction are severely limited, and the situation won't change without radical reforms of political institutions.
The Western establishment has settled consolidated view about China. Three years ago the authors of the epochal economic bestseller 'Why Nations Fail. The Original of Power, Prosperity, and Poverty', Daron Acemoğlu and James A. Robinson, expressed their point of view quite clear:
'In the case of China, a growth process, that is based on 'catch-up' effect, foreign technology import and low-tech industrial products export, will last only for some time.'
Nonetheless, it will over — at least when China will approach the standard of living comparable to the level of middle-income countries in transition.'
In 2015, the labor in China is becoming more expensive than in Russia. Taking into account inflation and ruble exchange rate, Russians' real wages in dollar terms in 2015 were lower than Chinese' and Brazilians'.
So, production in China is becoming quite expensive
What will happen next?
The Fed will continue (and the ECB will start) to raise interest rates, what will lead to an outflow of funds from emerging markets and the loss of reserves by their central banks (China has already announced the reduction by $ 512 billion at the end of 2015). Recurring investments will support US and European economies and trigger a dollar rally against most currencies. Oil exporters will continue a price competition, bringing the quotations up to $ 25-27 per barrel (which is comparable to the prices of the late 1990s, adjusted for inflation), but it still won't destroy the US oil and gas producers.
The sharp drop in demand for consumer commodities in most regions of the world will become apparent in a few months, and China will have to stop trading on its stock exchange for many times. Markets will no longer trust the Beijing statistics, realizing that the real growth of the Chinese economy in 2016 will not exceed 4-4.5 percent. The recession in Russia will be more significant than in 2015, and the only one among the BRICS, who will show promise, will be India. Only those countries, that have a commodity-dependent economy, but relatively diversified — Norway, Canada, Australia, United Arab Emirates – will handle the situation.
Unfortunately, Russia is not on that list.