China Wobbles

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Dramatic news from Chinese markets grabbed headlines worldwide last month, while also leaving many emerging markets (EM) analysts wondering what the full fallout from Shanghai and Beijing would be, and in particular what this would mean here in the Gulf.

For Qatar, China’s wobbles have come at a time when relations – both trading and diplomatic – have never been stronger. Thus, the impact of recent events and the longer-term issues behind them may be amplified for Doha in the days to come, both for the bad and the good.

Black Monday

To recap, China’s recent crisis was spectacular in both size and speed.

Just three months ago, the Shanghai Composite Index (SHCOMP) had hit a seven-year peak, reaching 5,166.35 points on June 12, following a surge of around 150% in the previous 12 months.

But this huge speculative bubble, fuelled in large part by many over-leveraged individual investors, then burst with a global bang.

Despite some drastic interventions by the Chinese authorities, by July 27, around two-thirds of all companies listed on the Chinese mainland (i.e. not including Hong Kong) had been suspended from trading, after losing value up to their daily 10% limit.

Further drastic measures followed, including, on August 11, the biggest one-off devaluation of the yuan in 20 years, followed by three more daily cuts.

This surprise move came after reports of a major slump in Chinese exports, with the devaluation aiming to redress this, particularly with regard to non-dollar-denominated exports, where the yuan had been appreciating. The Chinese authorities also likely calculated that a devaluation would strengthen Chinese companies’ exports, helping the SHCOMP to bounce back.

Yet the immediate effect of this move was to accelerate capital flight, a phenomenon that grew after news on August 21 that Chinese factory activity had slowed to its lowest level since 2009. On Monday, August 24, with stock markets around the world also in rapid decline, the SHCOMP had its largest single day fall since 2007, dropping 9% to 3,209.91 – China’s Black Monday.

The immediate impact of all this on Qatar was most evident on the Qatar Stock Exchange (QSE), although this faired better than some of its regional peers. The QSE lost 1.9% in August, while Saudi Arabia’s exchange dropped 17.6% and Dubai’s 11.6%. Many of these losses were a continuation of declines resulting from falling oil prices, although these were also accelerated by the bad news from China.

However, the more troubling news coming from the People’s Republic has been the impact on world commodity prices of the overall deceleration of Chinese economic performance.

In the 10 days after August 11, oil prices fell 6%, while copper fell 5% over the same period and the Thomson Reuters Core Commodity CRB Index fell around 4%.

This slide has been testimony to the enormous importance of China to global commodities consumption, with Qatar also a major player in supplying the People’s Republic with some of those consumption needs.

China is Qatar’s fourth-largest LNG export market after Japan, South Korea and India. Exports of LNG to China rose from zero in 2008 to 7m tonnes per annum by the end of 2013, meeting one-third of China’s total LNG demand and making Qatar China’s single largest LNG supplier.

At the same time, total two-way trade between the two countries tripled from 2008 through to 2013, topping $11.5bn.

Since then, in November 2014, the Qatar Investment Authority (QIA) signed an agreement with China’s CITIC Group to launch a $10bn regional investment fund, while in April 2015 the Emir visited China and Qatar Central Bank (QCB), in a deal with Industrial and Commercial Bank of China (ICBC), opened the first centre in the Middle East for clearing yuan-denominated transactions.

That same month QNB, Qatar International Islamic Bank (QIIB) and China’s Southwest Securities also signed a memorandum of understanding to set up an Islamic finance company in the People’s Republic.

All of this is evidence of the deepening bilateral relationship. Indeed, companies such as China Harbour Engineering – which is doing the key excavation and reclamation works for new Hamad Port – and China National Offshore Oil Company (CNOOC) are now common sights in Doha.

So continuing softening in China is not good news for Qatar’ exporters, although cheaper Chinese imports will likely stoke price deflation in the construction sector and for many manufactured goods, to the benefit of domestic projects. Qatari investors in China will also find their riyals going much further.

Indeed, the yuan devaluation – which has in turn triggered devaluations in many other emerging markets – may also be part of a strategy to make the currency more market sensitive.

At present, the Chinese government sets a dollar rate around which only a slight fluctuation is allowed – an arrangement that in August alone obliged Beijing to spend around $100bn of its estimated $4 trillion in foreign reserves propping up the yuan.

A more market-oriented currency, which may be the longer-term result of the devaluation, may also improve China’s chances of becoming part of the IMF’s global currency basket, a prize Beijing has long been after. Qatar’s establishment of a yuan clearing centre may therefore be a smart move in terms of being well placed to benefit from any such change.

At the same time, China is still a powerful economic force – forecast GDP growth may have been revised down, but still stands at around 7% for 2015.

Yet the collapse in Chinese stock markets – and Beijing’s often clumsy response to the crisis – does highlight other longer-term worries about the economy, now the world’s second largest.

That economy is engaged in an at-times painful transition to consumption-led growth, with credit bubbles still needing to be worked out of the system, along with some major restructuring and opening up. Like the rest of a world now heavily dependent on China’s economy, Qatar may have to ride out a few more bumps on the road ahead before that transition is complete.

---This original article from OBG originally appeared in Qatar's The Edge magazine, October 2015 issue.

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