To understand the scale of the forces moving global markets, it is sometimes better to start with somewhere small: say, Slovakia. Last year its GDP — the sum of the goods and services traded with its 5.4 million residents — was $100 billion.
This gives some context as to how much the Chinese are dumping into the global financial system to keep their “boom” going. In the four days to this Thursday, China is reckoned to have sold foreign exchange reserves equal to Slovakia’s economic output in an effort to support the value of its currency. For good measure, the world’s second largest economy is thought to have spent a further $15 billion — or Jamaica — on propping up the yuan yesterday.
“The market is heading for a nice little crisis in September or October,” said one senior trader, who is wrestling with how to position himself as world markets head towards a meltdown that some believe could eclipse the 2008 financial crisis.
A nine-day losing streak for the FTSE 100 demonstrates how shocks in Asia are being felt in western markets. The blue-chip index suffered its worst decline since 2003 as investors weigh up what China’s increasingly obvious woes mean for a world that has grown dependent on it for growth.
Closer to the epicentre of the looming crisis, the situation looks worse. More than $8 billion was withdrawn from collapsing emerging stock markets in the past seven days, the seventh week running of decline, while government bond funds, an ultimately safe haven asset, recorded their seventh consecutive week of inflows, according to Bank of America Merrill Lynch.
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Even this is not “bearish” enough for the BAML analysts, who said at least a further $15 billion would have to leak out of the developing world before it might be time to start buying again — even with the MSCI Emerging Markets index, down 10 per cent since the start of the year, breaking through its 2011 low.
Asian currencies have been some of the biggest victims, with the Korean won and the Malaysian ringgit falling heavily. At least one big Malaysian bank is thought to be attempting to offload the sterling-denominated loan it made to finance the multibillion-pound development of London’s Nine Elms quarter, as the more than 20 per cent fall in the currency has turned the debts into a potential death trap of a carry trade.
The markets’ travails are little surprise to Anthony Peters, a seasoned broker, who has seen his fair share of ups and downs in his more than 30 years working in banking. “Emerging markets is and always has been the next big thing. I think I can safely say that, in that year period, the only economy to truly emerge and to join the elite of developed economies is South Korea; the rest of them pop their heads up and down,” he said.
The hope among investors is that Chinese policymakers can somehow magic up more growth, thereby stabilising commodity prices and giving the markets reasons to believe that the economic situation is not as dark as the many alarm bells currently ringing might suggest. “China probably needs to take additional policy actions to boost growth. The dollar needs to reverse. There needs to be signs of stronger growth in the developed world. Maybe there has to be a global valuation adjustment in all markets,” said Chris Iggo at AXA Investment Managers.
Yet while all these changes could take place, there is a rising sense of panic in the City that what little control central bankers and governments might have is quickly being lost. “We’ve had the gravy train for so long, it’s uncharted waters now,” said one London-based trader.