- The Washington Times - Wednesday, July 8, 2015

China’s stock market has plummeted more than 30 percent in recent weeks, but the communist nation’s internal trading system remains isolated enough from the rest of the world that the Obama administration and others are confident that the turmoil won’t have an immediate impact on the U.S. economy.

A prolonged Chinese downturn could dampen long-term prospects for U.S. companies hoping to reap greater profits from Chinese consumers in the years ahead, but analysts generally agree that the economic crisis in Greece is likely to be more dangerous to global economic stability in the short term.

“Greece is one-twentieth the size of the Chinese economy, at max, but Greece is an open economy and it runs on euros, so it’s having a direct effect on the European Union and other countries, including the U.S.,” said Scott Kennedy, who heads the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies in Washington.

China’s financial firewall of capital controls is still largely in place, and that’s why there’s not a direct effect on us,” Mr. Kennedy said in an interview Wednesday. “It’s telling that it has taken a 30 percent drop in China’s markets for us to take notice.”

“The New York Stock Exchange and Nasdaq bond yields have barely budged,” he said. “They’ve started to take notice, but really just through their peripheral vision, not because the drop is having a direct effect on our markets.”

Treasury Secretary Jack Lew appeared to agree, telling an audience at the Brookings Institution on Wednesday that “China’s markets are still pretty much separated from world markets.”

“They’re obviously moving towards being more integrated, but right now they’re not,” Mr. Lew said.

At the same time, concerns are growing that the nosedive in China’s Shanghai Composite Index — as well as an even bigger plunge of more than 40 percent over the past three weeks in the more speculative Chinext Price Index — has been so severe that it will undermine pro-Western market reforms that Chinese President Xi Jinping has been trying to implement for the past two years.

U.S. and Chinese officials convened in Washington two weeks ago for the seventh meeting of the U.S.-China Strategic and Economic Dialogue to discuss key issues and address the economic challenges facing both nations.

A key goal of China’s reforms is to expand China’s consumer spending power — something that could have long-term effects on the global economy.

Mr. Lew and others say the big unanswered question centers on how the market tumble might affect long-term growth in the world’s second-largest economy.

“How do Chinese policymakers respond to this, and what does it mean for the core condition of the economy?” the Treasury secretary said Wednesday, asserting that Beijing is “moving from a heavily centralized, industrialized economy slowly to a more market-oriented and consumer-oriented economy.”

The reforms will “lead to slower, but hopefully a more sustainable level of growth [in China], which will also improve the economic conditions of Chinese people and be a boost to the global economy,” Mr. Lew said, adding that if Beijing’s reaction to the stock market plunge is “to put the brakes on reforms, it will slow that process.”

The Xi government already is engaging in a heavy-handed attempt to get the stock market under control. Beijing in recent days has announced a halt to initial public offerings and has begun funneling government funds into the Shanghai exchange to try to stem the hemorrhaging.

The Chinese markets continued their slide Wednesday despite another round of government intervention.

Analysts are divided over how to read the intervention, which could be a signal that Beijing is rethinking its reform strategy — a development that could have negative implications for foreign companies hoping to make increased profit from Chinese consumers in the years ahead.

Reform ‘at a glacial pace’

General Motors Co. announced this week that its vehicle sales in China were roughly flat for June, despite having slashed prices up to 20 percent on 40 models.

GM and its Chinese joint-venture partners sold 246,066 cars in China during June, virtually unchanged from the same month a year ago, the U.S. automaker said in a statement Monday.

“I think Jack Lew is correct that the real issues is to what extent will this effect Chinese economic policy with regard to economic reforms they’ve been rolling out the past two years,” Mr. Kennedy said. “Will they halt that in favor of stimulus? Or will they continue on that path of economic restructuring toward a much more efficient economy?

“If they don’t continue on the economic reform trajectory that they had been going on, Chinese consumer spending power will stop growing,” he said. “The Chinese economy will be less robust and less a driver of global growth than we and many others have benefited from.”

Others say such concerns may be overblown.

Mr. Lew and other Obama administration officials may have high hopes for the Xi government’s reform agenda, but Sean Miner of the Peterson Institute for International Economics in Washington said the reality is that “these reform moves were already going at a glacial pace to begin with.”

Mr. Miner, who manages the institute’s China program, said the market plunge may not be as a big of a deal as it appears.

“Year to date, the Shanghai stock exchange is still higher than it was at this time a year ago,” he said, although he cautioned that the downward fluctuation could have serious implications inside China.

“Chinese investors rely a lot on sentiment and also on signals from the government to make their next move,” said Mr. Miner. “Well, the government encouraged people to invest in the stock market and now they’ve been bitten, so confidence in the government is shaken.

“This could have implications outside the stock market,” he said. “If we see more negative economic indicators come out over the next two months, then people might panic more than they normally would — and that’s why the government is throwing everything it has at this right now, because they want to maintain their stature and their ability to control the market.”

It may be too early to forecast the true impact of the market plunge.

“The major impact is still cloudy,” said Derek Scissors, an Asia economics analyst with the American Enterprise Institute in Washington.

“Chinese stocks have soared and crashed before, last time in 2007-8, and will again,” Mr. Scissors said Wednesday in a statement emailed to reporters. “When stocks aren’t soaring and crashing, the Chinese property or debt markets are. This is a rerun, not a new show.”

He also pointed to several unanswered questions: “Does the stock market swing further weaken China’s commitment to the fundamental economic reforms it so badly needs? China had a lot of economic challenges in front of it before this. Stocks aren’t important by themselves, but are they the straw that breaks the camel’s back?”


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