- The Washington Times - Monday, August 24, 2015

Fears mounted Monday that China’s deepening economic woes could soon derail the global economy, as stock markets nosedived around the world and the Obama administration pleaded with Beijing to be more transparent about its economy to win back investor confidence.

Analysts warned that the months-old crisis is undermining Chinese President Xi Jinping’s pro-Western reform agenda.

While some argued that China’s economy is doing better than it appears, scrutiny of Mr. Xi’s economic policies is said to be mounting among Chinese elites, who stand to lose the most from the plunge.

In Washington, debate is heated over the extent to which Chinese leaders may have overstated the nation’s growth rate for years — and are now paying the price.

What most analysts agree on is that the onus is now on the Xi government to convince the world that it has the situation under control.

“It’s going to be really important for the Chinese to clarify what the heck is going on and really soon,” said Scott Kennedy, who heads the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies.

SEE ALSO: China’s stock market, Shanghai Composite, opens down 6.4 percent

When the Chinese president visits Washington next month, he is “going to have to be crystal clear about what China’s economic policies are and how that relates to the U.S.,” said Mr. Kennedy, “because obviously we’re at a point where what they do with their markets directly affects our markets.”

The White House, which previously appeared less than eager to jump into the fray, also called for more transparency from Beijing.

“A more transparent economy is one that will benefit not just the Chinese economy but the global economy,” White House spokesman Josh Earnest said.

Markets plunged across Europe and Asia on Monday after China’s Shanghai Composite closed down 8.5 percent, its worst single-day drop since 2007 and signaling solidly that Beijing’s attempts to remedy slowing growth by devaluing its currency and infusions of government funds into the market have essentially failed.

Monday also brought a roller coaster day in New York, where the Dow Jones industrial average plummeted 6 percent at the start of trading, then rallied back toward its opening point in the afternoon before closing down 3.58 percent.

The market fluctuations were quick to roil the Republican presidential campaign.

With Beijing owning roughly $1.2 trillion worth of U.S. debt, several candidates blamed exposure to China — along with President Obama’s spending policies — for the market contagion from the Shanghai Composite’s plunge.

As the Dow Jones average slumped early in the day, Republican presidential front-runner Donald Trump said he had long warned about U.S. vulnerability to China.

Wisconsin Gov. Scott Walker went further, calling on President Obama to have some “backbone” and cancel Mr. Xi’s state visit to hold China accountable for “increasing attempts to undermine U.S. interests” through “massive cyberattacks against America” and “militarization of the South China Sea.”

Away from the campaign talk, however, many economic analysts cautioned against overreacting to the market fluctuations and several said China’s woes may not be as bad as they appear.

“China’s stock market reflects economic fundamentals in China the way Donald Trump reflects the quality of democracy in the United States: There’s only a loose resemblance between the two,” said Mr. Kennedy. “In other words, it’s hard to read the market developments alone as an indication of what’s going on with the wider economy.”

Despite the market plunge, for instance, the Shanghai Composite is still trading at a higher total volume than it was at the start of the year. Other indicators — such as soaring service-sector and household-income growth rates, as well as low unemployment — suggest the nation’s overall economy and gross domestic product continue to grow at much faster rates compared with Europe, the rest of Asia and the Americas.

David Dollar, a senior fellow with the Brookings Institution, said the core challenge for China’s leaders is: “Can they communicate to people that the economy is actually in pretty good shape and they have indicators to show that it continues to be in pretty good shape?”

But the government in Beijing — still officially a one-party communist dictatorship — is notoriously opaque when it comes to such matters. Clearer communication from the Xi government seems more vital now that global stock exchanges are reacting to the news from China.

One of the biggest concerns revolves around the government’s sudden devaluation this month of its currency, the yuan.

The yuan was allowed to fall to a four-year low in a move that analysts say was likely engineered as part of a strategy to keep China’s exports at competitive prices in overseas markets.

Before the devaluation, observers generally had come to view China’s crisis as mainly internal. The world watched closely when the Shanghai Composite plunged at the start of the summer, but there was little impact on international markets.

The Obama administration’s posture was that Chinese government firewalls on foreign investment meant China’s market fluctuation would have little to no impact on Americans.

“China’s markets are still pretty much separated from world markets,” Treasury Secretary Jack Lew said in July.

Common reasoning among U.S. companies was also that the situation wouldn’t have much of a direct effect on them because those companies were not dependent on exporting to China relative to other markets around the world.

But China’s woes now appear to be creating a ripple effect of crises in markets such as Europe and Brazil, where the companies’ are more dependent on exports to China.

“It may be that what’s settling in,” said Mr. Dollar, “is that what’s happening in China is beginning to affect major parts of the world economy, and the United States can’t be insulated from that.”

Obama administration officials said Monday that U.S. companies are prone to holding back from investment in China because of a lack of transparency in the economy.

“We certainly hear from business leaders in the United States that are interested in doing business in China that a more transparent business environment would make them more likely to do business there,” Mr. Earnest said.

The transparency issue reared its head in mid-July, when China’s National Bureau of Statistics estimated the nation’s GDP growth rate to be on par with the government’s past projections of roughly 7 percent for 2015 — even as the Shanghai Composite was tumbling.

Some analysts responded at the time by asserting that there was no way the numbers could be accurate.

Mr. Earnest spoke only broadly on the issue Monday, saying that “obviously, there’s significant financial consequences for how reliable the data that is issued by the Chinese government turns out to be.”

He stressed that ahead of Mr. Xi’s visit, the administration’s message remains “focused on the need for China to continue to pursue financial reform, and to move rapidly toward a more market-determined exchange-rate system.”

But there are concerns that pro-Western reforms that Mr. Xi has been trying to implement for the past two years are being undermined.

The Chinese president has consolidated power in the Communist Party to push the reforms, and the fear is that a deepening internal economic slide could inspire wealthy elites outside the government to cavort behind the scenes to derail Mr. Xi’s efforts.

“You might have a kind of internal unrest happening where more wealthy elite are upset at the leadership because they have a lot of their money in the stock market,” said Sean Miner, who manages the China program at the Peterson Institute for International Economics in Washington.

“China is trying to do all of these reforms at this time, and it’s very tough for them at a point when the economy is weakening and you have all of these people giving differing views,” he said. “They really need to steady the ship and continue to move toward these reforms, especially capital account liberalization, and they now seem to be slowing up a bit.

“If really wealthy Chinese elites are losing their money, that might cause a kind of political trouble for the president.

“We’re not at that point yet where Xi is going to have serious trouble,” Mr. Miner said. “He still has quite a grip on power. There are still a lot of people who would like to oppose him but can’t because of this anti-corruption campaign.”

• Guy Taylor can be reached at gtaylor@washingtontimes.com.

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