Tragic explosions in China caused seismic shocks 160 kilometers away, and the devaluation of the renminbi has sent shockwaves worldwide.
Tianjin is the biggest port in northern China. It is the maritime gateway to Beijing and the fourth largest urban center in the Middle Kingdom. In 2013, Tianjin handled more than 500 tons of cargo that included coal, oil products, mineral ores, steel and chemical products. It is a classic example of the ambition of modern China that has enabled the country to achieve the fastest and biggest industrialization in history. The recent explosions in Tianjin are a chilling reminder that Chinese success has come at a price and at huge risk.
The causes of the blast are still unknown, but the BBC suggests that water might have been sprayed on calcium carbide to create the highly explosive acetylene. This acetylene blast might then have detonated ammonium nitrate. The initial explosion on August 12 was the equivalent of detonating three tons of TNT, while the following one was the equivalent of 21 tons. Satellites orbiting the Earth picked up the second explosion and so did the seismometer station in Beijing, which is 160 kilometers away.
The explosions destroyed goods worth millions of dollars. More than 100 people have already died and over 700 have been hospitalized. The real risk is air, water and soil contamination. Many fear that toxic chemicals released by the explosions might cause lasting damage to Tianjin residents. Incidents of cancer and birth defects might rise dramatically. Chinese authorities have ordered residents living within a three-kilometer radius of the blast site to leave. Even as an evacuation is taking place, Chinese soldiers of the National Nuclear Biochemical Emergency Rescue Team have launched a rescue mission at the core area of the explosion site.
The tragic Tianjin explosions are a spectacular example of the catastrophic environmental damage currently taking place in China. As Berkeley Earth observes, 1.6 million people die every year because of air pollution in the Middle Kingdom. The Chinese Environment Ministry has admitted that about 60% of underground water and a third of surface water in China is unfit for human contact. Heavy metals in China’s soil are now entering the country’s food supply. What people eat on a daily basis is damaging their health and wellbeing.
It is little wonder that President Xi Jinping has urged authorities to learn from the “extremely profound” lessons of the Tianjin explosions. He has called for “safe development” and asked authorities to put “people’s interest first.” The truth is that China is going through much soul-searching. As pointed out by this author earlier, Zhu Rongji’s Shanghai has abandoned the gross domestic product (GDP) growth target. Furthermore, the current Chinese economic model might have reached its limits. China cannot grow as it used to and the costs of growth have become too high.
China’s dash for growth was inaugurated by Deng Xiaoping. Deng initiated reforms in 1979 after his 1978-visit to Bangkok, Kuala Lumpur and Singapore. He took Lee Kuan Yew’s advice and turned to markets, abandoning communes. In 1992, Deng famously embarked on Nanxun, which literally means southern tour. During this tour, Deng called for radical reform and the opening up of the Chinese economy. The rest is history.
In 2015, the Chinese economic juggernaut set into motion by Deng has stalled. Chinese property values have fallen dramatically and stock prices have dived to new depths. Both property firms and stock market investors are deep in debt. Therefore, the government has been bailing out both property firms and the stock market to maintain some semblance of confidence in the economy.
These bailouts have not quite worked. Hence, this week the Chinese decided to devalue their currency. On August 11, the renminbi dropped by 1.9% against the dollar. The next day it fell by a further 1%. The aftershocks of the devaluation are being felt in all parts of the world.
In 2010, Brazilian Finance Minister Guido Mantega declared that the world was witnessing an “international currency war.” In his view, this game of competitive devaluation in which each country lowered the value of its currency to boost exports was a de facto trade war. His comments came in the aftermath of Japan, Taiwan, South Korea and the US devaluing their currencies. German Finance Minister Wolfgang Schäuble was not happy with the US policy of quantitative easing, which is simply buying assets from commercial banks and financial institutions to release more money into the economy. Schäuble was of the view that the US policy did not make sense and increased “uncertainty to the global economy.”
Mantega and Schäuble were onto something. If every country was to devalue its currency, then no one would be any better off. Existing asset price bubbles would worsen and inflation would eventually rear its ugly head. Devaluations are only short-term measures that mitigate the immediate blow of a crisis. This is what Chinese authorities are trying to do. By lowering the renminbi, China is obviously attempting to boost exports by making them cheaper. It is also trying to stimulate domestic consumption of its products. For instance, shares of companies making luxury products such as Burberry have fallen because their products will now cost more for Chinese consumers. Authorities hope the Chinese will now buy domestic replacements instead.
The devaluation of the Chinese currency is affecting countries differently. The Federal Foreign Office of Germany states that China is the fourth biggest buyer of German exports. The Middle Kingdom will certainly be purchasing less Porsches and other German goods going forward. Latin America, Africa and Australia have flourished recently by sating ravenous Chinese hunger for natural resources. Between 2000 and 2012, Sino-Brazilian trade alone increased by 2,550%, from little over $10 billion to $255.5 billion. These China-dependent economies will suffer. The Chinese devaluation will hurt other economies seeking to boost manufacturing such as India and Vietnam. With a cheaper renminbi, China has become just a touch more seductive for companies competing to cut costs.
Yet the devaluation has its downsides even for China. Chinese entities have borrowed $1.6 trillion in foreign currencies, 80% of which is denominated in dollars. A more expensive dollar could mean companies defaulting on their payments and even going out of business. This would entail either loss of capital for foreign investors or bailouts from the Chinese government to save jobs, or a bit of both. The global economy is now infernally inextricably interlinked. The dragon has sneezed and the rest of the world has caught a cold.
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