China turmoil batters faith in Beijing’s management skills
BEIJING: Stock market and currency turmoil has battered Chinese leaders’ reputation as shrewd economic managers and fed doubts about their willingness to push through more wrenching reforms.
In the stock market, a “circuit breaker” to suspend trading in the event of wide price swings backfired and fueled steeper falls. It was withdrawn after just four days. That followed complaints curbs on stock sales and other emergency measures imposed to stop last year’s market plunge were clumsy and fueled investor panic.
In currency markets, Beijing has struggled to squelch expectations it plans to devalue the yuan. That has forced the government to spend tens of billions of dollars to defend the exchange rate.
Such volatility is common in developing countries, but China’s status as the world’s second-largest economy and biggest trader mean missteps cause global shockwaves. And the latest turmoil has a political tinge because it comes as Beijing is promoting a bigger role for itself as a regional military power and in managing international trade and finance.
The Communist Party under President Xi Jinping wants the prosperity that comes from free-market competition and has promised entrepreneurs a bigger role in the state-dominated economy. But when stock prices plunged last June, the party reached back to the era of central planning for the sledgehammer of direct government control. It banned sales by large shareholders and ordered state companies to buy.
Forecasters who expect China to keep growing at a healthy rate “pinned that expectation on a belief that market forces will be given greater play,” said Mark Williams, chief Asia economist for Capital Economics. “If the government cannot bring itself to allow market forces to be felt in China, then the outlook is a lot grimmer.” The party has won praise for making it easier to start and run a private business. But it has yet to act on what the World Bank and other reform advocates say is the most pressing issue: Cutting monopolies and other privileges of state companies that control industries from banking to energy to telecoms and are a drag on China’s steadily slowing economic growth.
That reflects the intense political forces opposed to reducing the state’s role in the economy, especially from the party’s own factions that see a threat to the flow of money and other resources they can extract from government industries. Beijing’s moves on stocks and currency “are indicative of tension between the leadership’s desire for market-oriented reform and the apparent fundamental objective of control,” said Louis Kuijs of Oxford Economics in a report. “How this tension will be resolved in the coming years will be central to China’s economic development and thus will have major global ramifications.”
The latest turbulence is a blemish on an acclaimed record of achievement as party leaders steered China through two decades of explosive growth to become the world’s second-largest economy.
A society of farmers and factory workers who lived in state housing evolved in little over a decade into a nation of homeowners. After the 2008 crisis, China rebounded quickly while Western countries struggled. China emerged as the most important growth market for designer clothes, Hollywood movies and smartphones.
But now, the World Bank and other advisers say China has reached a point where the economy no longer can be micromanaged by bureaucrats if it is to keep growing. Last year’s economic growth, due to be reported next week, is forecast to have slowed to 7 percent or below. That still would be the world’s second-highest, surpassed only by India, which is one-tenth China’s size.