Bei­jing de­flect­ing blame for bub­ble

The Washington Times Weekly - - Geopolitics - BY DAVID R. SANDS

Chi­nese of­fi­cials say they know ex­actly who is to blame for a wild week that rocked global stock mar­kets, bat­tered the cur­ren­cies of emerg­ing mar­kets around the globe, sent com­mod­ity prices lower and may have shaved a per­cent­age point or two off of global GDP growth next year: any­body but China.

Any sug­ges­tion that Bei­jing’s mis­han­dling of a stock mar­ket bub­ble, its clumsy moves to de­value the yuan or its in­abil­ity to ad­just its econ­omy to slow­ing growth was at fault is “un­fair and ground­less,” the of­fi­cial Xin­hua news agency said in a re­mark­ably de­fen­sive com­men­tary pub­lished last month.

“China is not the main cause of the cur­rent chaos in the global fi­nan­cial mar­kets. Prob­lems in the West are more to blame,” the com­men­tary ar­gued. “The cur­rent fi­nan­cial tur­moil is a re­flec­tion of many com­pli­cated prob­lems, most of which arise from Western coun­tries, not from China.”

But whether global in­vestors will buy what China is selling is another ques­tion.

Af­ter a week in which Wall Street saw some of its big­gest one-day trad­ing losses in years — fol­lowed by a smaller rally — the big­gest loser may be the cred­i­bil­ity of China’s lead­ers and their rep­u­ta­tion as com­pe­tent stew­ards of the world’s new­est eco­nomic su­per­power.

“Un­til re­cently, do­mes­tic and in­ter­na­tional in­vestors had been in­cred­i­bly san­guine,” said Rob Kahn, a se­nior fel­low for in­ter­na­tional eco­nom­ics at the Coun­cil on For­eign Re­la­tions. “The Chi­nese econ­omy was grow­ing, and author­i­ties had the re­sources and the con­trol to easily man­age any dis­rup­tion.”

Now, he said, “that’s clearly been punc­tured.”

An­a­lysts said the wild gy­ra­tions in China’s stock mar­kets — which gov­ern­ment of­fi­cials strug­gled to get un­der con­trol — should not be con­fused with the real Chi­nese econ­omy, which still is grow­ing, although not at the 10 per­cent-plus an­nual rates of re­cent decades. But the shaken faith in China’s lead­ers to man­age the econ­omy will have real con­se­quences.

“Many of the mar­ket’s sub­stan­tive wor­ries (eco­nomic col­lapse, fi­nan­cial col­lapse, com­pet­i­tive de­val­u­a­tion) are overblown,” Arthur Kroe­ber, head re­searcher for Hong Kong-based Gavekal Drago­nomics, wrote in a note to clients last week.

“But mar­kets trade as much on pol­icy sig­nals as on eco­nomic re­al­ity, and there has clearly been a break­down of com­mu­ni­ca­tion be­tween Bei­jing and the rest of the world.”

The Korean news­pa­per JoongAng Ilbo wrote last week: “Ex­perts as well as in­vestors mostly be­lieved that the Chi­nese author­i­ties had the ca­pac­ity to con­trol the econ­omy and fi­nance. But skep­ti­cism now pre­vails due to the dis­as­trous fall­out from in­ter­ven­tion­ist pol­icy that ag­gra­vated mar­ket volatil­ity.”

The skep­ti­cism has even ex­tended to the qual­ity of the eco­nomic data that Chi­nese state agen­cies put out. Many an­a­lysts be­lieve that China’s growth rates have slowed far be­low the of­fi­cial 7 per­cent es­ti­mate for this year, and that credit woes at state-owned banks and lo­cal gov­ern­ments are far worse than have been of­fi­cially ac­knowl­edged.

Mel Gur­tov, editor in chief at the quar­terly Asian Per­spec­tive, noted in an anal­y­sis Fri­day that China’s lead­er­ship has been rocked by an un­usual string of re­v­erses in re­cent days.

“In just the last few weeks, these in­clude a ma­jor in­dus­trial chem­i­cal ex­plo­sion in Tian­jin … suc­ces­sive cur­rency re­val­u­a­tions, a stock mar­ket crash, an anti-cor­rup­tion cam­paign that has landed quite a few big names, and a widen­ing net to catch lawyers and any­one else who speaks for the hu­man rights and rule of law,” he wrote.

“The sys­tem it­self,” he added, “is un­der the mi­cro­scope.”

Trou­ble for Xi

The ques­tions are es­pe­cially ill-timed for Chi­nese Pres­i­dent Xi Jin­ping, pre­par­ing for his first state visit to Washington next month. An­a­lysts say Mr. Xi is par­tic­u­larly vul­ner­a­ble to eco­nomic up­heaval be­cause he has cen­tral­ized, to an un­usual de­gree, over­sight of eco­nomic and fi­nan­cial pol­icy — a job tra­di­tion­ally han­dled by the prime min­is­ter — in his own per­son.

The re­cent eco­nomic con­vul­sions blamed on China have made Mr. Xi a po­lit­i­cal tar­get for both Repub­li­cans and Democrats in the 2016 pres­i­den­tial race. Florida Sen. Marco Ru­bio on Fri­day called on Pres­i­dent Obama to down­grade Mr. Xi’s visit to protest sus­pected Chi­nese cy­ber­at­tacks and Mr. Xi’s cam­paign to “push Amer­ica out of Asia.” Fel­low Repub­li­can can­di­date Gov. Scott Walker of Wis­con­sin said the Chi­nese leader’s visit should be can­celed al­to­gether.

And China’s re­cent moves to de­value the yuan, in part to make Chi­nese goods more com­pet­i­tive in trade with the U.S., have reignited com­plaints from Democrats that Bei­jing is not play­ing fair in the in­ter­na­tional trade mar­ket. If Bei­jing and other coun­tries in the re­gion de­value as the U.S. dol­lar con­tin­ues to climb, Mr. Kahn said, the Obama ad­min­is­tra­tion could find it­self in a tough spot.

The U.S. “wants to sup­port the mar­ket re­forms [in China], but they want to sell a clear sig­nal not just to China but to other coun­tries in the re­gion [that] this is not a free get-out-of-jail card to sim­ply de­pre­ci­ate,” Mr. Kahn said.

Na­tional Se­cu­rity Ad­viser Su­san Rice was in Bei­jing Fri­day to make the fi­nal prepa­ra­tions for next month’s visit, and the two sides stuck to pleas­ant gen­er­al­i­ties about what will be on the agenda.

Af­ter meet­ing with Mr. Xi, Ms. Rice re­ferred to “is­sues of dif­fer­ence and some dif­fi­culty” that the sides “need to work through, and we will con­tinue to do so.” She called the up­com­ing trip a “mile­stone in deep­en­ing our co­op­er­a­tion and strength­en­ing our re­la­tion­ship.”

The mood may im­prove slightly with signs that both the Chi­nese and U.S. stock mar­kets have set­tled down af­ter more than a week of ex­treme volatil­ity.

China’s big­gest stock mar­ket man­aged gains on Thurs­day and Fri­day af­ter los­ing nearly a quar­ter of its value in the five trad­ing days be­fore that. The ma­jor Wall Street mar­kets also ral­lied strongly Wed­nes­day and Thurs­day, although the U.S. stock mar­ket is still on track for its worst month in more than three years.

Econ­o­mists say the clas­sic cure for China’s deeper woes would be to move away from the ex­port-ori­ented model that fu­eled spec­tac­u­lar growth rates to fo­cus on greater do­mes­tic growth and con­sumer spend­ing at home. But Zhiwu Chen, Yale Univer­sity pro­fes­sor of fi­nance, said such a strat­egy would pose ma­jor po­lit­i­cal risks for the gov­ern­ment by threat­en­ing the pros­per­ity of the state-owned en­ter­prises that ben­e­fit from ex­ports.

“The Chi­nese gov­ern­ment has been say­ing for more than 20 years that there had to be a shift from in­vest­ment-driven to con­sump­tion-driven in terms of where the Chi­nese econ­omy gets most of the growth boost,” said Mr. Chen. “Af­ter hav­ing said this for 20 years, not much progress has taken place.

“Un­less pri­va­ti­za­tion re­ally takes place of as­sets and state-owned busi­nesses,” he added, “it’s very, very dif­fi­cult to make pri­vate con­sump­tion play a big­ger role in the Chi­nese econ­omy.”


Chi­nese of­fi­cials are cast­ing about for scape­goats to blame for the mis­han­dling of a stock bub­ble that dented the coun­try’s econ­omy.

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