Every winning streak comes to an end. China has become an economic powerhouse during decades of breakneck growth, but suddenly is looking a bit wobbly. The question this summer as the country has lurched from stock-market meltdown to currency devaluation is whether the run is finally nearing an end.
Some experts even wonder whether China’s leaders are starting to panic.
Outwardly, the picture has been relatively clear for some time. While still growing incredibly fast by Western standards, China’s economy is slowing – last year’s growth rate of 7.4 percent was the smallest in 24 years. This year, the target is even lower, 7 percent, and it may be hard-pressed to make that.
In principle, the government is OK with slower growth. Officials realize the party can’t go on forever. They know they need to put the economy on a new footing that – like Western economies – is based more on domestic consumption instead of investment and exports. They say it should be driven more by market forces than government directives. And they realize that making the transition will be tricky.
They knew this was coming. So why all the drama? Is China in trouble? Or is the government, while coming up short on style points, just taking care of business?
Here are some varying – at times contradictory – analyses.
Be Worried: This group regards the devaluation of the Chinese yuan, the largest in two decades, as evidence that the country’s leaders are very worried about economic growth, and by extension, political stability.
China’s exports fell by 8 percent last month compared with the same month a year ago. Labor costs have been rising and the value of the currency, which has been closely tied to a strengthening dollar, puts Chinese products at a disadvantage compared to other exporters. Factories are scaling back or closing; workers are losing their jobs. Strikes are increasing.
So President Xi Jinping and the Chinese leadership opted for a devaluation to claim back some of the export markets and boost growth. According to economist Li Daokui at Beijing’s prestigious Tsinghua University, quoted by Keith Bradsher of the New York Times, the stakes are high: If Xi can’t ensure that living standards keep improving, “that will undermine the long-term sustainability of the regime.”
James Suroweicki of The New Yorker says that China’s economic managers have a reputation as stable and capable. However, their actions this summer raise the question “whether policymakers actually have a real plan for the economy, or whether they’re just winging it.”
To Paul Krugman, the Chinese authorities have been looking clueless. Their efforts to prop up the stock market by measures such as suspending trading in some stocks, banning short selling, and pushing investors to buy, puts them in the uncomfortable position of having their credibility tied to the health of the stock index.
Don’t Worry: According to this analysis, the fall in the value of the yuan has less to do with regaining export markets than reinforcing China’s position as one of the truly big players in the world economy.
A decision later this year by the International Monetary Fund will determine whether the yuan can become a global reserve currency – one that many countries hold and use to pay their debts. Others are the U.S. dollar, the euro, the British pound and the Japanese yen. The IMF has hinted that the Chinese currency is still subject to too much government control.
China’s devaluation was accomplished by in effect loosening some government control over how its exchange rate is set, a step toward answering that criticism.
As far as the stock market is concerned, this analysis by Forbes contributor Jack Perkowski argues that focusing on its recent gyrations misses the point. Rather, China has taken several steps that have opened its markets up to new money, and its stock market troubles are merely a byproduct of the development of more normal capital markets.
Worry, but about Something Else Entirely: For a perspective that goes beyond the health of the Chinese economy next week or next year, it’s worth looking at this piece by Salvatore Babones of the University of Sydney.
In his view, China is getting caught in multiple traps: demography, capital flight, easing of government regulation and its inability to collect enough money via taxes. A wealthier – and aging – population demands more government services. So far China has solved that problem with one-time fixes. Meantime, capital has been leaving the country. And those with money find it relatively easy to avoid taxes.
Facing demands for government services without developing the means to pay for them “will push the Chinese government into the familiar Third World pattern of perpetual fiscal crisis.”
If he’s right, what we’re seeing this summer is just a small taste of much bigger problems to come.
Another voice maybe offering clarification is Justin Leverenz…
…of Oppenheimer, who manages some $40 billion in funds, who lived in China for 10 years, speaks Mandarin, is actively involved and engaged with the Chinese in a practical way, and who offered some opinion and feedback in an interview with Charlie Rose last night.
I couldn’t find a link to this interview to post here, but you can probably watch a replay if you look over the TPT schedule. It’s worth watching.
The most fundamental emphasis he offered is – MISUNDERSTANDING of China – on subjects both broad and narrow – by those in the West.
For example, he says the recent and widely trumpeted Chinese currency “devaluation” is not a devaluation at all, but rather a natural depreciation in the developing circumstances and conditions of other currencies. This might sound like sophistry, but his narrative sounds pretty reasonable.
He also emphasized the role of the tragedy of Chinese history in the 1800s, when the country was seriously abused by colonial predators, and from which they see themselves still recovering.
I don’t know whose opinion is most accurate and reliable on what is really going on in China, but it seems to me there is such a length and breadth of opinion, it’s probably wise to learn as much as you can while refraining from drawing rigid conclusions.