great wall

Developments are occurring in China that may have a big impact upon us, here in the west, and later this decade. The world is an interconnected place. What happens on the other side of the Great Wall has an impact upon us. Take the financial crisis of 2008, as an example. In the build-up to this crisis, China’s policy of maintaining a cheap currency meant that it was going out and buying US assets, mainly government bonds. At the same time, cheap imports from China was surely a reason why inflation was low in the west.

And it was Chinese money and cheap Chinese goods flooding into the west that helped create the conditions that lead to low-interest rates, and rising debt, maybe this was one of the underlying causes of what went wrong in 2008.

Now, forward-wind the clock to 2017. Things are happening in China

For one thing, its foreign reserves are falling rapidly. China’s foreign reserves are now worth less than $3 trillion, or $2,998 billion at the end of January, if you want the precise figure. That’s their lowest level since 2011.

In fact, Chinese foreign reserves have fallen by over $1 trillion over the last couple of years, or so. They fell by $13 billion in January alone.

This is not necessarily a problem for China, it can afford it, after-all being down to your last $3 trillion is not usually seen as a crisis.

But think about the impact on the west. What this means is that instead of buying western assets, bonds in particular, China has been selling them.

Given this, maybe we should have expected a bigger hit on global interest rates by now, or maybe we just need to give this more time. In theory, at least, the global savings glut, which many economists say is the underlying cause of the economic woes of the last decade, is getting smaller.

And then there is inflation.

Chinese producer price inflation rose to 5.5 per cent in December, a five-year high. To put that in perspective, it was negative a few months ago.

And when producer prices go up in China, you would expect some form of inflation to be imported to the rest of the world, in due course.

This all seems pretty significant.

But it is not all gloom.

For one thing, the decline in Chinese reserves may abate. A lot depends on what Donald Trump gets up to; if the dollar strengthens, which it may do if the US starts imposing tariffs, then China may stop selling its reserves.

As for China’s producer price inflation, Capital Economics thinks that it won’t last, and will soon go into reverse. If that is right, then things will look very different later this year.

But as things stand, and if they stay like this, the impact on us, in say a year’s time, maybe pretty darn dramatic.