Abacus | Why you shouldn’t believe the horror stories about China’s economy
Sceptics paint a bleak picture, but Beijing has many tools at its disposal to combat worst-case scenarios
Everyone loves a horror story, and there are a number of real chillers doing the rounds just now about China, the yuan, and the looming risk of a financial collapse. These stories differ in detail, but generally they share a similar plot. It goes something like this: rich Chinese are losing faith in their economy and the yuan. As growth slows and debt mounts, Chinese fearful of an impending crisis are shifting their wealth offshore and into foreign currencies. These outflows are putting pressure on the yuan, which is weakening in response. In turn this weakness is prompting more and more mainland Chinese to try to preserve their capital by seeking safety in foreign currencies. The result is a self-reinforcing feedback loop that threatens to precipitate the very crisis those fleeing the yuan hope to escape.
It’s a gripping tale. Happily, like all good horror stories, it springs more from imagination than from fact.
That’s not to say it has no basis at all in reality. Clearly China’s growth is slowing, debt does continue to rise relative to gross domestic product, the yuan’s exchange rate against the US dollar did weaken last year, and the domestic economy has seen net capital outflows.
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But none of this portends the imminent financial death spiral the more blood-curdling China-sceptics describe.