World haunted by heavy reliance on China

PHOTO: Reuters

TOKYO - The fortunes of the global economy are ever more intertwined with those of China. And the world is coming to the realization that the Chinese economy is not as invincible as it once seemed.

Misconceptions are complicating matters. The Chinese central bank on Aug. 11 abruptly devalued the yuan in a move widely seen as an attempt to expand exports, amid a stock market collapse and slowing gross domestic product growth. This triggered a series of currency devaluations in other emerging economies and threw their stock markets into confusion.

The impact probably rattled China more than anyone. This is because the decision by the People's Bank of China was part of an effort to get the yuan into the currency basket that underpins the International Monetary Fund's Special Drawing Rights, alongside the dollar, euro, pound and yen. The idea was to allow the yuan to move more flexibly. The IMF called the yuan's devaluation "a welcome step."

Some might wonder why Beijing is so intent on being part of the SDR basket. President Xi Jinping sees the move as a step toward global recognition of China as a major power in the international financial market. But China did not clearly communicate its reasoning, and the sudden change in currency policy caused serious jitters.

There have been other sources of confusion. In the US government bond market, word began to circulate in late August that China was unloading Treasurys. China's foreign exchange reserves decreased by nearly $100 billion (S$143 billion) that month, bringing the outstanding balance to the $3.5 trillion level - down from nearly $4 trillion at the end of June last year.

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