Fears about China’s econ­omy fes­ter at Davos

The Pak Banker - - OPINION - Alexandra Steven­son

AT the World Eco­nomic Fo­rum in Devon, chief ex­ec­u­tives and in­vestors are blam­ing China for a slump in global mar­kets. Fears about the coun­try's down­shift, as its of­fi­cial growth slowed to a quar­ter-cen­tury low, have dom­i­nated high-level dis­cus­sions, both dur­ing pub­lic de­bates and in smaller, pri­vate meet­ings. The fi­nancier Ge­orge Soros said at a din­ner on Wed­nes­day night that a "hard land­ing is prac­ti­cally un­avoid­able," adding that China is the root of the cur­rent fi­nan­cial cri­sis. But be­hind the gloom and doom a more com­plex pic­ture is emerg­ing among the global elite in this Alpine ski re­sort. Some of it is com­ing from those who have lived or worked in China. China's most in­flu­en­tial ex­ec­u­tives could be seen this week in Davos, in­clud­ing Zhang Xin, the chief ex­ec­u­tive of the real es­tate de­vel­oper SOHO China; Ya-qin Zhang, the pres­i­dent of the search en­gine gi­ant Baidu; Jiang Jian­qing, the chair­man of the In­dus­trial and Com­mer­cial Bank; and Jack Ma, the founder of Alibaba. Th­ese lead­ers have stepped in to ar­gue for a more nu­anced view on China. Some have de­fended China's po­ten­tial for growth as Western par­tic­i­pants voiced con­cerns and doubts. Neil Shen, a vet­eran ven­ture cap­i­tal­ist and one of China's most suc­cess­ful en­trepreneurs, told one panel dis­cus­sion about the evo­lu­tion of Chi­nese in­dus­try, that Chi­nese com­pa­nies were al­ready com­pet­ing in their own right in in­dus­tries like smart­phone man­u­fac­tur­ing.

Within the arena of fi­nan­cial mar­kets, Chi­nese and Western lead­ers alike ar­gued that the fears demon­strated in rocky mar­kets were over­stated. Last week, stocks moved into bear mar­ket ter­ri­tory - which oc­curs when stocks are down more than 20 per­cent from a high - in large part on the news of Yet many cited the larger con­cerns that re­mained over China's slow­ing econ­omy and whether its govern­ment will man­age its tran­si­tion from an econ­omy fo­cused on in­dus­try and ex­ports to one that de­rives most of its growth from con­sump­tion. And many wor­ried that an un­in­tended con­se­quence of Pres­i­dent Xi Jin­ping's an­ticor­rup­tion cam­paign would be con­tin­ued dis­rup­tion of the fi­nan­cial mar­kets.

Chris­tine La­garde, the man­ag­ing di­rec­tor of the In­ter­na­tional Mon­e­tary Fund, touched on th­ese points dur­ing a de­bate at the start of the con­fer­ence. China's big­gest prob­lem to­day was how its govern­ment com­mu­ni­cated with the rest of the world, Ms. La­garde said. "I would say also that given those mas­sive tran­si­tions that are un­der­taken pretty much at the same time and ac­cepted as such, there is a com­mu­ni­ca­tion is­sue," Ms. La­garde said, adding, "It's some­thing that mar­kets do not like." Last sum­mer, un­ex­pected ac­tions by the Chi­nese govern­ment started a global sell-off in the mar­kets. Some of those mea­sures nearly brought the mar­ket to a stand­still. At one point in July, a third of the stock mar­ket was frozen. In­vestors with big stakes in stocks were pro­hib­ited from sell­ing those stakes. Hedge funds were raided and short­sellers in­ves­ti­gated for what the govern­ment called "ma­li­cious" ac­tiv­ity, ac­cord­ing to state me­dia re­ports. The govern­ment even or­ga­nized large-scale pur­chases of stocks by govern­ment-linked bro­ker­ages and in­vest­ment funds to prop up the plung­ing mar­ket. Many of th­ese in­ter­ven­tion­ist ac­tions in the mar­ket were "the ex­act repli­cas that many other coun­tries, in­clud­ing the United States, have done in cer­tain parts of their mod­ern his­tory," Gary D. Cohn, pres­i­dent of Gold­man Sachs, said.

"The com­mu­ni­ca­tion is re­ally what's im­por­tant here; com­mu­ni­cat­ing what the Chi­nese mar­ket is go­ing to be and stick­ing with that the­ory no mat­ter how painful it is in the tran­si­tion," Mr. Cohn added. Speak­ing at the same event, Fang Xing­hai, the vice chair­man of the China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion, told a packed room, "We are learn­ing. We are do­ing it." Mr. Fang, whose reg­u­la­tory com­mis­sion was re­spon­si­ble for much of the stock mar­ket in­ter­ven­tion last year, added: "We should do a bet­ter job." This mes­sage, how­ever, was still lost on some of the more cyn­i­cal China watch­ers. Ken­neth Ro­goff, a Har­vard econ­o­mist who has long warned of a po­ten­tial fi­nan­cial cri­sis in China, re­mained skep­ti­cal. "There is a big pro­pa­ganda push to say ev­ery­thing is good, ev­ery­thing is fine." Ear­lier in the week he told at­ten­dees at the fo­rum that China's large ac­cu­mu­la­tion of govern­ment debt would one day be a shock to a fi­nan­cial sys­tem that "am­pli­fies shocks." Oth­ers with bear­ish views on China have kept their claws out. Jim S. Chanos, who once said China was "on a tread­mill to hell," said he re­mained deeply con­cerned. His hedge fund, Kynikos As­so­ciates, es­ti­mated that China's nom­i­nal gross do­mes­tic growth in 2015 was 5 per­cent com­pared with 15 per­cent just five years ear­lier. "China's debt prob­lems still lie ahead of it," Mr. Chanos said on Thurs­day, re­fer­ring to con­cerns about the ex­tent to which China's seem­ing eco­nomic growth is ac­tu­ally fu­eled by bor­row­ing.

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