By Adrian Grey
Markets love a meme. The current obsession is all things Chinese – stock market volatility, currency depreciation and the continuing freefall in commodity prices are, according to the prevailing view, all made in China.
There is a dissonance here. The same authorities that let the stock market collapse are apparently able to bend global FX markets to their will. However, it is far from clear that China needs a dramatically weaker yuan.
The worst GDP growth in 25 years, 6.9%, was in line with the stated goal of the government. This apparently hobbled economy has added growth equivalent to the GDP of two Switzerlands in the past two years.
What has played out so far in 2016 is an acute version of the themes that dominated during risk-off episodes in 2015: a strong dollar buoyed by clear monetary policy divergence feeding through to weak commodity prices, sharp currency swings and the shunning of equities and credit in favour of cash and safe havens.
This is a narrative born in the USA, not made in China.
It started with the end of the third round of US quantitative easing in late 2014 and has been given fresh impetus by the first increase in interest rates by the Federal Reserve (Fed) in almost a decade.
If US and global growth is derailed, the Fed will pause and markets will have something else to worry about. If US consumers spend the income boost from cheap gasoline in the shopping malls and growth remains robust in spite of the strong dollar, the global economy as a whole will benefit.
Until there is clarity about which course we are embarked on the markets will remain volatile.
Adrian Grey is head of fixed income & currency at Insight Investment
