Birth pains of China’s ‘new normal’ grip the globe

SBy HANGHAI, China (AFP) — Beijing is trying to maneuver the world’s second-largest economy into a “new normal’’ of slower expansion, but alarms have sounded over whether the transition will hit global growth as a Chinese stock collapse reverberates across markets.

After decades of double-digit expansion that have utterly transformed China, the vision that Communist authorities hold out for the future is one of more sustainable growth, fuelled by domestic consumer spending rather than exports and investment.

But the shift is suffering from birth pains.

China devalued its currency nearly 2percent on August 11, a shock move it described as a market reform but which was widely seen as an effort to boost exports, raising questions over the health of national finances.

Economic indicators are weak, including a more than six-year low in a manufacturing index for August.

And on Tuesday, the central bank cut its benchmark interest rates and the amount of cash banks must keep on hand, the latest attempt to stoke economic activity by increasing the amount of money institutions can lend.

“China is in the late stage of an investment-driven growth miracle,’’ Michael Pettis, a finance professor at Peking University, told AFP.

“The problem is that... means that the adjustment is going to be much more painful than you expected. And basically that’s where we are in China.’’

Investors are running for cover against a background of a 40 percent fall in its main stock market from its mid-June peak -- which Beijing’s interventions have not halted.

“I look at it very much as a crisis of confidence, or examples of lack of leadership,’’ Fraser Howie, an independent analyst and co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise’’, told AFP.

“What a change that is from economic mandarins who could walk on water,’’ he said.

During the 1997-1998 Asian financial crisis, China earned praise as a rock of stability for resisting a competitive devaluation even as currencies tumbled around the region.

In 2008, when the global financial crisis struck, Beijing unveiled a 4.0-trillion yuan (now $625-billion) stimulus package, which was widely credited with lessening the impact of the worldwide meltdown.

But this time China’s marketsaving measures are being branded a failure.

After stocks plummeted in midJune, the government intervened with an extraordinary rescue package which included setting up a “national team’’ to buy on its behalf and barring big shareholders from selling.

At first the indices rose. But the benchmark Shanghai Composite fell 8.49 percent on Monday, its biggest daily slump since February 2007, wiping out the year’s gains and sending shockwaves through world markets.

That was followed by a 7.63 percent slump on Tuesday that left it below the symbolic 3,000 mark.

“I think it was misconceived to begin with,’’ Howie said of the initial rescue package. “It was poorly executed. It’s clearly not showing to have any significant follow-through.’