The big chill from Beijing: America and China are propping each other up like a pair of old drunks, says Ruth Sunderland

 

Downward spiral? China’s slowdown is already hitting world trade and commodity-driven economies

Downward spiral? China’s slowdown is already hitting world trade and commodity-driven economies

The world is just as vulnerable today to a Chinese meltdown as it was at the beginning of the week, even though the stock market has recovered a little from Monday’s shattering fall.

Consider for a moment the strange, mutually dependent relationship between Washington and Beijing.

America and China are locked together in an uneasy embrace at the heart of the world monetary system.

The US is the world’s biggest borrower and China is the biggest lender, making the Americans deeply reliant on China, their old Cold War enemy, to fund their colossal budget deficit.

China is the largest foreign holder of US Treasuries – IOUs signed by Uncle Sam – with $1.27 trillion of them. Communist officials in Beijing are in effect underwriting American consumer lifestyles.

Alongside the budget deficit, the US is also running a trade deficit – where imports exceed exports – of around $40billion a month, and China accounts for most of that.

In the last financial crisis, China acted as a backstop to the US economy and banking system. The Chinese, through sovereign wealth funds, took a $1billion plus stake in Wall Street bank Morgan Stanley and one in Barclays, helping it escape a UK government bailout.

These little mentioned facts illustrate how intertwined are the fortunes of China with the west. The first and second largest economies in the world are propping each other up like a pair of old drunks, both fearful the other will fall over.

It is still not clear whether this crisis can be contained or whether it will in hindsight, prove to have been another Lehman moment.

The share plunge in itself will affect confidence among consumers and businesses and take a toll on the real economy. China’s slowdown is already hitting world trade and commodity-driven economies, such as Russia, Brazil, Canada and Australia, will be affected by the slump in demand. The Chinese have also been huge investors in Africa.

Bad debts are mounting in the Chinese banks and there could also be serious pain for banks such as London-listed Standard Chartered, which has $50billion of commodity loans on its books.

The vulnerability of international banks to China is much larger than to, say Greece – RBS economists put out a note last month claiming US banks’ exposure to China was $100billion, compared with just $12billion to the Greek economy.

This is the first major crisis with the new China at its epicentre, so we are in terra incognita.

At the least, economists fear a wave of deflationary pressures that could push the world into the permafrost of low growth and low inflation, similar to that suffered in Japan in its lost decades.

 

Hester jackpot

It takes more than a mountain of bad debts, the worst financial crisis since the Great Depression or a global share meltdown to unhinge the Stephen Hester money wagon.

Having made one fortune out of selling basket-case mortgage lender Abbey to Santander, he extracted millions of pounds in pay as the rescue chief executive of RBS – though the state-backed bank remains stubbornly un-rehabilitated.

At his latest gig, as chief executive of insurer RSA – formerly known as Royal & SunAlliance – he is on form. Even as the Big Chill from Beijing was wiping billions off the value of British savings and pensions, Hester and his boardroom colleagues were preparing to sign up to a £5.6billion takeover bid by Swiss operator Zurich.

This will crystallise a takeover jackpot of around £8.5million, which is not bad for 18 months work.

The irony is that Hester seemed to be doing a decent enough job at RSA, which had a market capitalisation of just £3.6billion when he arrived.

He has added value for shareholders – but the fact remains he is reaping huge personal rewards by handing the insurer to the Swiss when his job is only half done. You can hardly blame him for it, most of us, if offered that level of reward, would do the same – pushing to the back of our minds the fact that many insurance mergers, including the one between the old Royal and the Sun Alliance, have been disastrous.

But there has to be something wrong with a pay system that incentivises chief executives to sell out pronto to the highest bidder, rather than work over the long term to create British champions.

 

Quid pro quo

So the Competition and Markets Authority has given Poundland the green light to take over 99p Stores.

Hurrah. It took the monopolies watchdog four months to work out that there is quite a lot of competition in the discount market, something even the most casual shopper could have told them.

How did they think the merger might harm consumers? Did they fear prices would soar and the new business would have to be renamed Twopoundland?

Given the level of consumer disaffection with banks and energy companies, it’s a shame the CMA couldn’t find something better to do.