The same gut-wrenching feeling that gripped the world as it spiralled into the crisis of the late 1990s; the same aura of potential collapse with far fewer rescue options this time haunted the landslide in Chinese stock values.
Even the Chinese media, not known for running down the home team, called it ‘Black Monday’ as Chinese markets slid 40 per cent, a bigger drop than during the dot com boom. It looked as though the Chinese economy was sliding into a black hole and about to take the world economy with it.
It didn’t happen but the trauma has exposed the weaknesses of the world economy, especially in emerging markets, and revealed that China’s seemingly omnipotent economic managers do not enjoy the same degree of command and control available in the political sphere, nor are they yet capable-perhaps for political reasons-of taking the country to the next level of economic liberalisation. Having risen in a graceful crescent for the last decade, the Chinese economy is pausing in its flight and may describe a less predictable path over the next few years.
And that is bad news for the world economy in general and those, in particular, who have come to depend on China as the confidence bellwether of global economic activity.
But cooler heads will recognise that this was a necessary learning exercise for the managers of the Chinese economy, who will doubtless learn from it. For most what was really unnerving was the way good money was poured after bad in a futile effort to prop up the market when the best course would have been to let the market take its course. But here there are important domestic political considerations: the stock market is totemic of the government’s efforts to modernise the economy and, casino though it may be, the average Chinese punter has come to believe that it can only go up.
So Beijing poured money in to try and maintain the illusion and prop up the market-to the tune of $4.2 trillion-or more than the value of the German economy. Perhaps the world’s most expensive-ever public relations exercise. An expensive lesson for all concerned-coming after the government’s allowing the value of the yuan to decline-but a necessary one.
But the hard evidence that the Chinese economy is in serious trouble is lacking. The equities market is a relatively small part of the economy. Matters would be much more serious had there been a meltdown in the housing market. Not only does it underpin the banking system, amounting to about 25 per cent of GDP, but activity has been pretty healthy over the past few months, with sales and prices holding up well.
China is much more dependent on its consumers to keep the economy ticking over and there is no sign that they are losing any of their enthusiasm for the high street, while its expanding services sector looks healthy-all of which should have been encouraged by the recent cut in interest rates. China’s growth rate has slowed to about 4.6 per cent, which is low by its standards, but is still helping to power the world economy at rates unheard of only a decade ago.
So the dragon may have suffered a few cuts and bruises but it is still the best hope for the continued health of the world economy. What has been thrown into doubt is the ability of the bureaucrats in Beijing to safely manage the transition to a full market economy. This would be a formidable task for any nation but especially for one still so wedded to the communist command model throughout its bureaucracy. Even managing the decline of some of its heavy manufacturing industry has proved difficult. But President Xi Jinping knows that the future acceptance of his government depends upon the success of a reform which brings the fruits of the nation’s labour to a broader cross-section of the people. In an unprecedented admission in the columns of the People’s Daily editorial writers let it be known that there had been furious debate about the pace of reform at recent party conclaves and the strong implication was that the president had not got his way. It appears that his pushing hard to eliminate corruption has run up against those who believe he is using the issue to sideline opposition as he builds a power base which many are now saying could rival that of Mao Tse-tung. There is some way to go before that might be achieved and at present the main plank of his appeal-greater prosperity for all rather than ideology-is faltering. But at the present President Xi is the best hope for China and the world as everyone relies on the Middle Kingdom to bring them greater prosperity as well.