JON REES: All of us should worry if China starts to tremble

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Officials at the People’s Bank of China have spent the past few days trying to reassure anyone who will listen that the devaluation of its currency, the yuan, for the first time in 20 years was just a matter of housekeeping. Nothing to see or hear, please move along…

But when the world’s second biggest economy shudders, the rest of us are right to take fright.

A weaker yuan offers an immediate boost to exports by making Chinese goods cheaper in other countries and that matters when China is responsible for 15 per cent of world output. 

Not so sweet: Devaluation will affect companies selling goods to China, too, including plenty of British ones

The fear is that a flood of cheaper goods will overwhelm rivals in other markets. US presidential nominee Donald Trump has warned that cheaper Chinese exports could ‘devastate’ US markets.

China acted after its exports fell by more than 8 per cent in July, while shares on its markets have plunged by 30 per cent this month.

The doomsday scenario is that a destabilising currency war could break out: a race to the bottom for currencies and markets worldwide in a bid to undercut a potential tide of cheap Chinese exports.

Devaluation will affect companies selling goods to China, too, including plenty of British ones. 

Luxury goods firms such as fashion retailer Burberry face a potential hit as its high-end trenchcoats and handbags move out of reach of the country’s middle class, who will no longer console themselves with a Johnnie Walker whisky made by Britain’s Diageo at the end of a hard day.

British pension funds have made big bets in China, investing in local firms and others heavily exposed to the country, and we all have an interest in their success.

China’s self-described ‘abundant’ foreign currency reserves of £2.4trillion matter to us, too – the future of Britain’s nuclear power industry is predicated on huge Chinese investment, for instance. So too is the future of large swathes of the rest of our infrastructure.

Despite China’s claims that its currency move was about allowing the yuan to trade more accurately against other currencies, its case has been undermined by the European Central Bank. Minutes from the latest ECB meeting in July showed it was worried by falling Chinese share prices and the country’s cut in interest rates.

They show the ECB came very close to anticipating a devaluation of the yuan for reasons that had nothing to do with allowing the currency to trade more accurately.

It used to be said that when America sneezes the world catches a cold, but nowadays all of us should worry when China starts to tremble.