In speeches and writings, Chinese President Xi Jinping often delivers the rhetoric of a Communist Party hardliner. And yet more than ever, capitalists worldwide are depending upon this Leninist – one who is in the midst of a power struggle – to prop up the global economy.
Concerns about China contributed to Wall Street’s biggest one-day sell-off last week since 2011, and the slide could continue when markets reopen on Monday.
Friday’s rout was triggered by a report that China’s manufacturing output had dipped to its lowest point since the 2009 global economic crisis. Investors increasingly fear China’s slowdown could be a tipping point for many emerging economies, many of whom grew dependent on selling commodities to China during its go-go days.
The 531-point drop in the Dow on Friday wasn’t all about China, but China’s economic troubles loom large.
The 531-point drop in the Dow on Friday wasn’t all about China, of course. Investors also are worried about inflated equity prices, dropping oil prices, and the possibility the U.S. Federal Reserve could soon approve an interest rate hike. But China’s economic troubles loom large.
“The market may have overreacted,” said Charles Morrison, an Asia-Pacific expert who heads the East West Center in Honolulu. “But the Chinese manufacturing slowdown is a data point that creates concerns worldwide, because China’s manufacturing sucks up so much of the world’s resources.”
By some measures, China’s economy has grown to be equal in size with that of the United States, and it is still growing at a rate of roughly 7 percent yearly. But that’s a slowdown from previous years, and the impact is huge on China’s trade partners.
China’s economic transition was always going to be difficult, but developments this year suggest that things are not going according to plan.
George Magnus, Oxford University.
As Chinese manufacturing and steel production has dipped, it has crushed demand for Indonesia’s coal and Australia’s iron ore. Some of Brazil’s economic troubles are linked to reduced Chinese demand for its commodities. Here in Taiwan, the government reported the slowest growth since 2012 for the first half of the year, largely because of reduced Chinese demand for Taiwan’s manufactured goods.
In China, the final arbiter on all decisions is President and Communist Party Secretary Xi Jinping, the 62-year-old son of a party revolutionary. Since taking control of the party in late 2012, Xi has consolidated power more than any Chinese leader since Mao Zedong.
Like Chairman Mao, Xi has clamped down on dissent, and also railed against past communist leaders whom he sees as traitors to the cause – namely former Soviet leader Mikhail Gorbachev. At the same time, Xi has launched a broad anti-corruption crusade, which has enhanced his domestic popularity but has not given him unfettered power to pursue some of his priorities.
One of these is an economic transformation. “China is looking for a new growth model,” said Morrison, with a shift away from cheap manufactured exports to higher-end products and more domestic consumption.
But China’s old model created formidable vested interests, including monopolistic state enterprises, retired party leaders and corrupt local officials with stakes in China’s vast energy and steel-making industries.
China’s manufacturing sucks up so much of the world’s resources.
Charles Morrison, East-West Center
Last Thursday, CCTV and other Chinese state media carried a surprisingly blunt commentary reporting that Xi’s reforms were encountering fierce resistance within the party.
“The in-depth reform touches the basic issue of reconfiguring the lifeblood of this enormous economy, and making it healthier,” said the commentary. “The scale of the resistance is beyond what could have been imagined.”
Earlier this month, the mouthpiece of the Communist Party, the People’s Daily, published a series of stories on retired cadres lobbying against Xi’s economic reforms and anti-graft efforts. Some argue the disciplinary crackdown has led bureaucrats and China’s wealthy to be reflexively cautious, slowing investment and government decision making.
Among China experts, there’s a spirited debate on whether Xi’s policies are a significant drag on the economy. Morrison thinks that demographic factors – including a reduction in cheap labor from rural areas – have hurt China more. As the country’s labor supply shrinks, wages are rising, and some industries are moving elsewhere to reduce production costs.
“Also, the government investment-led growth has resulted in excessive surpluses in some areas,” he added, reducing return on investment.
Others, however, say Xi has mishandled an already tough situation and is creating adversaries that could further destabilize his rule.
Failure of government intervention to prop up Chinese stock prices have experts doubting the government’s power.
“China’s economic transition was always going to be difficult, but developments this year suggest that things are not going according to plan,” wrote George Magnus, an associate at Oxford University’s China Centre, in the Financial Times on Friday.
“The centralization of power is proving to be a double-edged sword for reform, the anti-corruption campaign is choking off initiative and growth and the economy cannot be kept on an unrealistic expansionary path by unending stimulus,” he added.
As China’s economic challenges mount, economists and investors are watching whether Xi’s actions match his reform agenda. Lately, they have been disappointed. Despite lip service for embracing market forces, China’s leaders intervened quickly in July when China’s two major stock markets tanked.
While equity prices in China have little impact on its overall economy, the government’s intervention has further damaged the credibility of China’s management of its markets. And the fact that the government’s interventions have failed to stabilize stock prices has led many to believe China’s leaders are less omnipotent than is commonly believed.
Xi and his economic team have also come under criticism for China’s unexpected devaluation of its currency this month. Chinese leaders characterized the move as a first step in letting China’s currency, the yuan, float more freely based on market conditions. The yuan’s subsequent drop in value suggests Beijing may be sincere in that pledge, but skeptics have reason to wonder. A weaker yuan makes China’s exports less expensive compared to those of competitors, such as U.S. and European manufacturers. It has also prompted other countries, including Vietnam, to follow China in devaluing their currencies, which could further harm western companies trying to do business in Asia.
After a bad day on Thursday, the Dow Jones industrial average on Friday dropped more than 3 percent, or 530.94 points, to 16,459.75. The S&P 500 dipped a similar percentage – 64.84 points – to 1,970.89 and the Nasdaq Composite fell 171.45 points, or 3.52 percent, to 4,706.04.
On Monday and the coming week, the mood of Wall Street could be swayed by several factors: How the Asian stock markets respond several hours before the New York market opens; new data expected on the U.S. housing market and a preliminary estimate of the second-quarter U.S. GDP. If the latter exceeds expectations, it could help keep the bears at bay.
Stuart Leavenworth: @sleavenworth