This was supposed to be the Chinese century. The world’s second-largest economy had already overtaken the United States in terms of exports. The Chinese economy has swollen to five times its size of a decade ago. It contributes half of the planet’s economic growth and touches the everyday lives of people on all continents. China’s strength was evident when its vast stimulus plan absorbed the shock of the financial crisis of 2008-09.
Now it seems that the shock waves emanate from Beijing. As investors panicked about the implications of a China crisis, markets behaved as if a crash similar to that of 1929 was looming. Nearly $10 trillion has been wiped from world stock markets since their peak in June. Hundreds of billions disappeared yesterday alone as shares tumbled in Europe, Asia and the United States. The Dow Jones index fell briefly by 1,000 points. In the heat of the moment it seemed as if China had reached a tipping point and was going to take its trading partners down with it. Even responsible political advisers took to Twitter to set out precautions for the looming breakdown, including stocking up on food.
More sober heads put much of the selling frenzy down to August volatility, the kind of summer storm that arises when calming voices are on holiday. The turmoil is, despite the high dependency of the world’s economies on the health of China, unlikely to start a slide towards apocalypse.
Some of the problems arise from clumsy Chinese government interventions. Beijing was behaving rationally, given its faltering exports, to devalue two weeks ago. Then the government appeared to lose its nerve. Alarmed by the steep decline of the yuan, it intervened. Since then, some basic flaws of the Chinese model have emerged. It has become very difficult to set the fair value of Chinese stocks since Beijing is so determined to control the yuan. Although the Bank of China has asserted a commitment to a greater deployment of market forces and structural reform, the political leadership has made countering slow growth its chief priority. So much for President Xi Jinping’s promise to give markets a “decisive role” in an economy that is still making the long transition from communist-style five-year plans.
At the root of the crisis is the obscurity of Beijing’s intentions and the true state of the national economy. Quite simply, no one knows how bad it can get. It is this uncertainty that is gripping the markets. The 7 per cent growth rate announced by the leadership was plainly a massaged figure. As long ago as 2007 a Chinese economist confessed that figures of gross domestic product were unreliable and analysts should study electricity consumption instead. That economist, Li Keqiang, has become prime minister.
Advertisement
It is clear that China is slowing down much faster than anticipated. For the first time in six years, smartphone sales are declining and entrepreneurs are struggling because risk-averse banks favour state-owned companies. Volkswagen and GM are cutting back car production in China. The effects are being felt from Brazil (China is its chief trading partner) to Kazakhstan, which has followed Beijing into devaluation. Germany is being reminded this week that it is far more exposed to China than to Greece.
If the Chinese model really has run its course, the impact will be shattering. Yet the fundamentals that earned the label of the Chinese century are still largely in place. What is needed is transparency. China must also let its markets function more freely and accelerate the shift from an export-led economy towards greater consumption at home. All these concerns should be expressed clearly when President Xi makes his trips to the United States and Britain in October. In the meantime there is no need to stockpile pickled cabbage or storm the ATMs.