Clouds are looming over the Chinese economy – making its financial market tremble, causing rapid depreciation of currency and massive flight of capital out of China. The world hasn’t gotten used to looking at China as an economic superpower yet, and the construction of a 21st century empire hasn’t been accomplished, but everything already seems to be crumbling. But no matter how bad things might be, the Chinese economy remains huge. Reality has already been overturned. It is now time for the Western economy to catch the flu when China sneezes.
Are we facing another deep economic crisis or watching a new game, aiming to prevent the imminent reorganization of the world economic order into a structure that no longer depends on American power? The perception is that the movement of the forces in play is global and massive, similar to the impending eruption of a huge volcano.
Presently, all eyes are set on China, but we no longer have a clear view of what’s happening behind that big, smoggy cloud covering the country. As if the images of China’s extreme pollution are blocking our own capacity for a more lucid evaluation of where China is heading. Over the years, those images have skewed our view of the country. While we accuse China of being solely responsible for these record levels of pollution, we forget that we were the ones pumping money into China, making it the biggest – if not the only – manufacturer on this globe. It’s as if we were hoping that the pollution would stay restricted to Chinese territory and that we would be able to stay as clean as spring water. The fact that we do bear part of the responsibility does not mean that Beijing shouldn’t put a lot more effort into cleaning up this problem. They have, however, been trying to do something, at least. As Linette Lopez reminds us in the Business Insider:
On Tuesday, we learned that in 2015, $1 trillion left China. That was before anyone on Wall Street was talking about “communication issues.” It was before the volatility we’re experiencing now.
It happened during a period in which the structural issues with China’s economy started to really hurt growth. It’s when the government cut interest rates and bank-reserve requirements and made it easier for Chinese people to buy a car. It was when everyone started to get worried.
It’s also when, in response to bad economic data and resulting from a natural slowdown in growth, China devalued the yuan in August. Directly after that China had its worst outflows of 2015 — $194 billion in September.
The yuan and Chinese outflows stabilized in October and November while the currency was seeking entrance into the Special Drawing Rights club — a special group of reserve currencies designated by the IMF. After the yuan was accepted at the end of November, it started to slide.
Since the above measures did not improve the shape of Chinese finances, the head of the International Monetary Fund, Christine Lagarde, and other financial bigwigs in Davos decided that Beijing could only resolve problems of its economy with better communication. But things only got worse after that.
Lack of communication is also a central theme of a piece published in the Financial Times (FT) on Wednesday, which emphasized that China is not providing the rest of the world with any relevant information on its economy. While three decades ago, the Chinese government was not capable of collecting taxes, it now possesses enough tools to analyze and regulate its economy. “The PBoC (People’s Bank of China) has done a great job with its various reports but if you expect someone to go public, forget it,” one Chinese financial policy expert told the Financial Times. “The premier likewise is in no position [to do so]. That’s not how the Chinese bureaucracy works.”
For example, the central bank has published a detailed breakdown of the currency basket that it now advises investors to benchmark the renminbi against instead of the dollar. Many blamed the confusion over this policy switch, which was announced in December, for this month’s market and currency turmoil.
One person who advises Chinese policymakers says that the basket is an important tool as the renminbi transitions from a loose dollar peg system to a freely tradable currency, but he admits that its execution has not been perfect. “There is a strategy,” the adviser says. “It may not have been communicated very well, but it is not stupid. They just need to be a lot clearer and make sure [the renminbi] is damn stable against the basket.”
Clear? There is the strategy and there are tools. There is also information technology helping to extract and collect the data. And yet, as the FT claims, Chinese officials have no guts – or better, they have no freedom or authority to come forward and share more factual data with the business world. But as respectful as it may be, the FT, which bases its report only on Davos sources, does not fully unpack the problem. When it comes to China, the issue is not just a lack of communication, but also the way the information is collected. Keith Bradsher, the New York Times correspondent in Hong Kong, goes a step further while reporting on an investigation into Wang Baoan, the head of the National Bureau of Statistics of China:
The statistics bureau has a variety of responsibilities that are hard to balance even in the best of times.
The bureau is supposed to provide China’s leaders with an unvarnished assessment of the country’s economic strengths and weaknesses, even while reassuring the public about growth and maintaining consumer confidence. It is also supposed to release enough detailed and accurate information for investors and corporate leaders to make sound decisions about economic and financial prospects.
Few doubt that China has grown enormously over the past three decades. But economists, bankers and analysts who study the numbers believe that the bureau smooths data, underestimating growth during economic booms and overestimating it during downturns.
Many economists are worried that China’s economy is not expanding anywhere close to the nearly 7 percent annual pace that bureau data still show. By some estimates, the pace is half of the official figures.
Those skeptical about the data point, in part, to the underlying numbers.
Basing its analysis only on the data collected at Davos does not explain but here is something too remote from reality.
So what Bradsher informs us is that the Chinese economy has been massaged, and therefore cannot be considered relevant. It can only be good for guessing and speculating about how sick China really is.
To truly get to the heart of the problem, we need to read an opinion piece by Elizabeth C. Economy, C.V. Starr Senior Fellow and Director for Asia Studies at the Council on Foreign Relations:
No matter how talented the economists sitting around the perimeter of Zhongnanhai may be, decisions are made by the mostly non-economist leaders of the Communist Party, and economic reform puts their legitimacy at stake in a very fundamental way. It is easy to forget that all the proposed reforms—currency, stock market, state-owned enterprise, among them—require that the Chinese leaders loosen or lift their levers of control over the economy, something they are loath to do. Their legitimacy hinges largely on economic growth, and the market introduces a significant degree of uncertainty into the equation and their ability to deliver that economic growth. The leaders will constantly be experimenting with how much they can let go to achieve the change they want while still holding on to as much power as they can. We should expect economic reform to continue in fits and starts. …
The word on the hutong is that the buck stops with Xi Jinping. Some good may come from that, but here are a few of the reported challenges: First, the buck stops with Xi, but Xi does not necessarily understand the nuts and bolts of the economic issues he is trying to address; and when he does address them, it is not clear that he is entirely comfortable with the risk and volatility that transforming China into a market economy entails.
Second, Xi is primarily concerned with how the economy can advance China’s position in the world, so appealing to Xi’s sense of China as a global power is the way to get an initiative approved: hence “One Belt, One Road” (which many Chinese economists are concerned will not actually provide any real benefits to the Chinese economy) and the aggressive push for the Chinese yuan to be added to the International Monetary Fund’s SDR basket (a move some Chinese analysts believe happened before the country’s financial institutions were ready). Third, there are multiple power centers in the economic decision-making process: Xi and his advisers, Wang Qishan and his economic kitchen cabinet, and Li Keqiang and his increasingly hapless team. Enough said. And finally, when Xi travels, economic decision-making grinds to a halt, and Xi travels a lot.
I share Elizabeth Economy’s opinion. China is changing all the time in order to remain the same. Not only in Mao Zedong’s time, but even in ancient China. In the central kingdom, Confucian ideology was predominant, with great influence over the economy. It was Chinese emperors who, in accordance with Heaven, performed a very precise ceremony any time they thought it was appropriate to start the farming season. It was not by chance that historians and philosophers defined the Asian social order as “oriental despotism,” in which the role of the earthy divinity of politics was at the center of everything. Even Marxists spent a fair amount of time debating the notion of the Asiatic mode of production as a substantially different model that did not fit in existing Western societies. The central role of evolving Maoist thought, which now contains elements of Neo-Confucianism, plays a predominant role in Chinese political discourse to this day, with Chinese still having serious problems understanding and accepting the notion of a market economy. They declare it; they think they implement it; but how much of it will be actually running freely depends on the will of the tight political leadership.
When Deng Xiaoping replaced Mao Zedong and started opening China to global market forces, politics preserved government’s central role. That was the core issue of the debate before the Tiananmen Square massacre in 1989, when true reformers like Hu Yaobang and Zhao Ziyang tried to tackle China’s economic problem along with social reforms. The students on the square were butchered in order to keep the Communist Party’s supreme power intact, all while economic reforms were implemented by the gerontocrats with even more rigour than requested by Zhao Ziyang, the real reformer who rotted away in house arrest till the end of his days.