Anybody with half an interest in the stock market will have noticed that worries about the Chinese economy are having a rather large impact at present. When, earlier in the summer, the obsession was Greece and whether its comically inept Syriza government would come to a deal with its creditors, wiser voices said that China was a much bigger concern. They were right.
Weak economic data and a plunging Shanghai stock market pushed Britain’s FTSE 100 index down for a ninth successive day on Friday and led to a fall of more than 500 points on Wall Street. Oil prices dipped below $40 a barrel, but this good news for motorists should be tempered by the fact that if the world’s second biggest economy is in trouble, we should all be worried.
China’s importance is not in doubt, particularly since the global financial crisis. When, in November 2008, the world looked for governments to provide a Keynesian stimulus, the Chinese government was ready to deliver one of $600bn. As western governments and central banks undertook a repair job on their broken banking systems, the Chinese authorities were able to accelerate their country’s credit growth.
China grew 9% in 2009, the annus horribilis for western economies, and by more than 10% in 2010. Although growth has since moderated to nearer 7%, China has been the locomotive for the world economy during a time when Europe has lurched from crisis to crisis and America has struggled to achieve a normal recovery.
Even locomotives sometimes run out of steam, however, and that is one concern about China. Its authorities have come to accept that 7% growth is now a sensible target and the days of double-digit expansion, appropriate when emerging from backwardedness, could not be sustained indefinitely. Growth that is slower but better balanced and sustainable became the Chinese Communist party’s new ambition.
Advertisement
If that were all that was happening, the markets would have little to worry about. Because of the greater size of its economy, Chinese growth of 7% contributes more to the world than 10% did a decade or so ago. The concerns, however, go deeper.
One is the cackhanded way the Chinese authorities have interacted with financial markets. When China proposed an Asian Infrastructure Investment Bank a few months ago, an initiative George Osborne was quick to sign up to, it spoke of Beijing’s confidence and competence. Its dealings with the markets — a failed intervention to halt a stock market slide and a botched renminbi devaluation — are anything but.
There are also legitimate concerns outside China about whether President Xi Jinping, in his efforts to drive out corruption, is also — by ferociously centralising power in his hands — removing some of the dynamism that underpinned the modern Chinese growth miracle. Market incentives had been integral to Chinese growth, as was the opening up of the country to inward investment. Neither is currently being advanced.
Critics of the old Soviet system used to say that the concept of non-totalitarian communism was the same as “the idea of fried snowballs”. Beijing’s power hungry bosses face the same dilemma over economic management.