No longer a source of awe, Chinzila — the nexus between China and Brazil — has become the number one threat to the global economy.
The spillover from weakening Chinese industrial growth to commodity prices and volume demand has turned financial stress fractures into big faultlines within the emerging markets. Without careful management and co-ordination, it is possible these faultlines become systemic, with the Chinese renminbi the potential catalyst. While it has been clear since 2012 that China’s growth model was running out of road, the stock market bust and bungled currency depreciation brought the further realisation that policymakers overestimated their control over the economy. The price of these policy mistakes extends beyond several hundred billion dollars in lost foreign exchange reserves and a missed opportunity for banks burdened by bad debts to raise capital. They also come at a cost to the reform process itself. As long as growth is weak and the corporate sector beset by deflation, renminbi depreciation pressure will persist.
Attempts to discourage domestic capital outflows now risk creating a new bubble in the domestic bond market. Given that this financing channel remains the last hope of government efforts to kick the debt can down the road, a domestic bond market bubble may prompt capitulation to further renminbi depreciation in 2016.