China’s giant threat to global financial stability

It would only take three months of burning through reserves before China’s once mighty arsenal looks less than adequate for such a large economy

Chinese flag and industrial landscape

You may wonder why these Far Eastern traumas matter to Britain Photo: 2010 Getty Images

For stock markets, it’s been a grim start to the year, and it may be that things will get grimmer still before getting better. Everything rests on China, which is engaged in a herculean battle to defend its currency, the renminbi, against a veritable flood of capital outflows.

For those of us who spent the best part of a decade railing against the iniquities of Chinese reserve accumulation – designed to keep the currency from appreciating and by that means bolster the competitiveness of Chinese goods – this is a somewhat ironic turn of events.

Well, things have changed, and there is no doubt that it will be very bad for everyone should the renminbi go into free fall, setting off a further round of destabilising competitive devaluation in the region and adding to the already powerful deflationary forces coming out of China.

You may wonder why these Far Eastern traumas matter to Britain, less than 6pc of whose exports go to China. You may also wonder why we are worrying about defence of the Chinese currency at all when China still has $3.33 trillion (£2.3 trillion) of foreign exchange reserves to throw at the problem.

The fire power the Bank of England had to play with back in 1992, when it unsuccessfully attempted to defend the pound against speculative attack from the likes of George Soros, looks like a mere pea-shooter against China’s big bazooka.

Yet the fact is that the Chinese are burning through their reserves at frightening speed. It would only take three or four more months of this before China’s once mighty arsenal looks less than adequate for such a large economy. In the meantime, the foreign exchange reserve sell-off is having a similar effect to a monetary tightening, which is just what the fast slowing Chinese economy doesn’t need right now.

China is caught between a rock and a hard place. It risks triggering a dollar debt crisis across the region if it allows the currency to fall, but it further accelerates the economic slowdown by attempting to counter it.

Faith in China’s ability to keep growing at a supercharged rate has always rested on the entirely bogus assumption that because China is a command economy, it can in some way defy the usual laws of economics. Looking at the regime’s incompetent series of policy miscalculations the past year, you would be hard pressed to sustain this view.

Tipping point for retail

Robert Swannell seems a decent enough chap who I am sure makes a more than worthy chairman of Marks & Spencer.

But it was hard to know whether to laugh or cry over his insistence last week that Marc Bolland’s decision to “retire” early as M&S chief executivewas nothing to do with the board. He wasn’t pushed, insisted Mr Swannell; he decided to jump of his own volition.

Marc Bolland has said he will retire this year as chief executive of Marks & Spencer  Photo: PA

This was an odd claim to make because to seasoned observers of the retail scene, it has been obvious for an awfully long time now that Mr Bolland is a large part of M&S’s problem. He did his best in difficult circumstances, but it wasn’t good enough, as another dire trading update seems to confirm.

Either Mr Swannell is being kind on Mr Bolland, and therefore deliberately economical with the truth, or he and his board have been asleep on the job, for Mr Bolland should in truth have gone a long time ago.

When Sir Philip Green took a pop at M&S nearly 12 years ago, I marked myself out as a vehement opponent of this rough at the edges retail pretender. This was not just because his bid seriously undervalued the company, but also because I viewed M&S as some kind of national treasure which deserved protection from Sir Philip’s rapacious advances.

Unfortunately for M&S, hard-hearted consumers have no such sentimental attachment, and have been voting with their feet ever since. M&S is still no basket case, but it is perhaps also the case that it no longer deserves to survive, at least in its current form. Green understood this better than incumbent directors.

Observing the sheer volume of white vans driving around Britain’s roads and cities over the Christmas period, it is apparent that retailing is reaching some kind of tipping point which may soon render the old, high-cost bricks and mortar business model largely obsolete. All of that expensively priced high street and out of town property has become more of a liability than an asset. Employing staff who once manned the checkouts to wander around stores, half emptied of customers, shelf picking for online shoppers makes no sense at all, marking a return to the behind the counter retailing of a bygone age; it is hard to see how anyone can make any money out of it.

Even Ocado, which doesn’t have the property millstone round its neck, still struggles to show a profit. Small wonder the speculation that it has been trying to sell itself to Amazon. But why would Amazon buy when it can do the same thing itself? Small wonder too that Sainsbury is trying to acquire Argos. It’s nothing like the awesome business machine of Amazon, but with some kind of an online proposition and the systems to match, it may be better than nothing.

For too long, Britain’s leading retailers have had it easy; complacently comfortable in their market positions, they’ve been slow to respond in any fundamental way to market change and they have failed to challenge their business models in the way management should. As share prices only as yet partially anticipate, they are about to reap the whirlwind.

Shell tests investor loyalty

One last heave. Any takeover which takes nearly a year to close is bound to be something of a hostage to fortune, and so it has proved with Shell’s blockbuster bid for BG Group.

Ben van Beurden, the Shell chief, was on the road all last week attempting to persuade his own shareholders they should sign off on a deal that looks less than good value now that the oil price has sunk so low.

Despite the opposition of some top drawer names, including Standard Life’s David Cumming, the signs are that with all the enthusiasm of turkeys voting for Christmas, sufficient of them will. Few want to rock the boat by kicking against an otherwise highly competent management team. None the less, it may be close. Shell has tested shareholder loyalty close to breaking point. There can be no further misjudgments.


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