It used to be that when America sneezed, the rest of the world caught a cold. Now the US has real competition when it comes to spreading economic influenza. These days, it seems, if China sneezes, the world comes down with bird flu.
It used to be that when America sneezed, the rest of the world caught a cold. Now the US has real competition when it comes to spreading economic influenza. These days, it seems, if China sneezes, the world comes down with bird flu. prefix = o ns = "urn:schemas-microsoft-com:office:office" />
That is hardly surprising given China now accounts for 16 per cent of global output, the same as the US in purchasing power parity terms. Although economists have long urged Beijing to adopt pro-market reforms, the dirty secret is that China has borne the global economy on its back by doing precisely the opposite. Now its economy is juddering and its policymakers are allowing markets to exert a modicum of influence, global investors are looking on in horrified awe. Back in 2008, when the world went into virtual lockdown, it was Chinese state intervention - old-fashioned pump-priming on a truly colossal scale - that kept things going. Chinese demand for oil, iron ore and copper triggered booms in commodity-producing countries from South America to Africa. A surge in Chinese consumer demand kept US carmakers and Taiwanese chipmakers afloat.
For the Chinese economy, though, there was a price to pay. Total debt in the system has swelled since 2009 from 130 per cent of gross domestic product to about 280 per cent. As China ramped up investment levels to nearly 50 per cent of GDP, it built houses, offices and steel mills it simply did not need. Instead of leaning on exports, Beijing allowed the renminbi to appreciate against the dollar. Even when its arch-rival Japan set the printing presses rolling, China sucked it up. The renminbi has appreciated nearly 40 per cent against the yen since the 2013 launch of Abenomics, Tokyo’s bid to revive and reflate its economy.
Now Beijing is adjusting policy, clumsily and uncertainly. It has accepted that its economy cannot grow at 10 per cent forever. It has trimmed fixed capital investment, sending global commodity prices into a tailspin, and damaging economies from Brazil to Australia. More recently, after its futile attempts to tame the stock market, it has bowed to market forces. The result has been a frightening slide. Just in case things were not interesting enough, the People’s Bank of China picked this month of all months to move to a more market-determined exchange rate. It has let loose a whirlwind. “It’s payback time,” says Jonathan Slone, chief executive of CLSA, the Hong-Kong based brokerage, referring to the deferred cost of 2009’s $600bn stimulus.
The sense of panic emanating from China has been exacerbated by the mixed signals. The world does not have a clue what Beijing is up to. Take the exchange rate. Technocrats at the central bank were almost certainly not seeking a competitive devaluation. Rather, they wanted to move to a more flexible exchange rate in order to improve the renminbi’s chances of being included in the International Monetary Fund’s Special Drawing Rights. How do we know devaluation was not the real aim? Because China has since lavished tens of billions of dollars a day to prop up its currency. This shows just how tied up in knots Chinese policymakers have become. In order to convince markets the bank was seeking a market-friendly exchange rate regime it has been obliged to intervene on a massive scale. How perverse is that?
That in microcosm is the state of China’s economy policy as a whole. Policymakers find themselves squeezed between the Scylla of the market and the Charybdis of state control. The economic road map laid out at the Communist party’s Third Plenum in 2013 called for both “a decisive role” for markets and a “dominant role” for the state. All clear, then? In practice, policymakers have slalomed alarmingly between the two. They propped up the stock market, only to let it collapse. They reined in credit, only to open the sluices again. They announced drastic reform of state-owned enterprises, only to do not much of anything. Their push-me-pull you policies have left the world uncertain about the direction of travel and unsure about whether Chinese policymakers are as competent as they were always cracked up to be.
So where is China heading? If we look to Xi Jinping for clues we might deduce that state control will win the day. China’s president does not exactly give the impression of being willing to leave things to chance. He is all about control: of his party, of the media and doubtless of the economy too. When push comes to shove, state intervention is likely to prevail over what must have looked to China’s leaders like a reckless dabbling with market forces by their technocrats.
If that is right, Beijing will do everything to stabilise the situation and ensure a decent level of growth. In the short term, that will be good for the world. It may, however, only be postponing the day of reckoning.