China’s leaders on the spot after economic stumbles

Chinese officials say they know exactly who is to blame for a wild week that rocked global stock markets, battered the currencies of emerging markets around the globe, sent commodity prices lower and may have shaved a percentage point or two off of global GDP growth next year: anybody but China.

Any suggestion that Beijing’s mishandling of a stock market bubble, its clumsy moves to devalue the yuan or its inability to adjust its economy to slowing growth was at fault is “unfair and groundless,” the official Xinhua news agency said in a remarkably defensive commentary published late last week.

“China is not the main cause of the current chaos in the global financial markets. Problems in the West are more to blame,” the commentary argued. “The current financial turmoil is a reflection of many complicated problems, most of which arise from Western countries, not from China.”

But whether global investors will buy what China is selling is another question.

After a week in which Wall Street saw some of its biggest one-day trading losses in years — followed by a smaller rally — the biggest loser may be the credibility of China’s leaders and their reputation as competent stewards of the world’s newest economic superpower.

“Until recently, domestic and international investors had been incredibly sanguine,” said Rob Kahn, a senior fellow for international economics at the Council on Foreign Relations. “The Chinese economy was growing, and authorities had the resources and the control to easily manage any disruption.”

Now, he said, “that’s clearly been punctured.”

Analysts said the wild gyrations in China’s stock markets — which government officials struggled to get under control — should not be confused with the real Chinese economy, which still is growing, although not at the 10 percent-plus annual rates of recent decades. But the shaken faith in China’s leaders to manage the economy will have real consequences.

“Many of the market’s substantive worries (economic collapse, financial collapse, competitive devaluation) are overblown,” Arthur Kroeber, head researcher for Hong Kong-based Gavekal Dragonomics, wrote in a note to clients last week.

“But markets trade as much on policy signals as on economic reality, and there has clearly been a breakdown of communication between Beijing and the rest of the world.”

The Korean newspaper JoongAng Ilbo wrote last week: “Experts as well as investors mostly believed that the Chinese authorities had the capacity to control the economy and finance. But skepticism now prevails due to the disastrous fallout from interventionist policy that aggravated market volatility.”

The skepticism has even extended to the quality of the economic data that Chinese state agencies put out. Many analysts believe that China’s growth rates have slowed far below the official 7 percent estimate for this year, and that credit woes at state-owned banks and local governments are far worse than have been officially acknowledged.

Mel Gurtov, editor in chief at the quarterly Asian Perspective, noted in an analysis Friday that China’s leadership has been rocked by an unusual string of reverses in recent days.

“In just the last few weeks, these include a major industrial chemical explosion in Tianjin successive currency revaluations, a stock market crash, an anti-corruption campaign that has landed quite a few big names, and a widening net to catch lawyers and anyone else who speaks for the human rights and rule of law,” he wrote.

“The system itself,” he added, “is under the microscope.”

Trouble for Xi

The questions are especially ill-timed for Chinese President Xi Jinping, preparing for his first state visit to Washington next month. Analysts say Mr. Xi is particularly vulnerable to economic upheaval because he has centralized, to an unusual degree, oversight of economic and financial policy — a job traditionally handled by the prime minister — in his own person.

The recent economic convulsions blamed on China have made Mr. Xi a political target for both Republicans and Democrats in the 2016 presidential race. Florida Sen. Marco Rubio on Friday called on President Obama to downgrade Mr. Xi’s visit to protest suspected Chinese cyberattacks and Mr. Xi’s campaign to “push America out of Asia.” Fellow Republican candidate Gov. Scott Walker of Wisconsin said the Chinese leader’s visit should be canceled altogether.

And China’s recent moves to devalue the yuan, in part to make Chinese goods more competitive in trade with the U.S., have reignited complaints from Democrats that Beijing is not playing fair in the international trade market. If Beijing and other countries in the region devalue as the U.S. dollar continues to climb, Mr. Kahn said, the Obama administration could find itself in a tough spot.

The U.S. “wants to support the market reforms [in China], but they want to sell a clear signal not just to China but to other countries in the region [that] this is not a free get-out-of-jail card to simply depreciate,” Mr. Kahn said.

National Security Adviser Susan Rice was in Beijing Friday to make the final preparations for next month’s visit, and the two sides stuck to pleasant generalities about what will be on the agenda.

After meeting with Mr. Xi, Ms. Rice referred to “issues of difference and some difficulty” that the sides “need to work through, and we will continue to do so.” She called the upcoming trip a “milestone in deepening our cooperation and strengthening our relationship.”

The mood may improve slightly with signs that both the Chinese and U.S. stock markets have settled down after more than a week of extreme volatility.

China’s biggest stock market managed gains on Thursday and Friday after losing nearly a quarter of its value in the five trading days before that. The major Wall Street markets also rallied strongly Wednesday and Thursday, although the U.S. stock market is still on track for its worst month in more than three years.

Economists say the classic cure for China’s deeper woes would be to move away from the export-oriented model that fueled spectacular growth rates to focus on greater domestic growth and consumer spending at home. But Zhiwu Chen, Yale University professor of finance, said such a strategy would pose major political risks for the government by threatening the prosperity of the state-owned enterprises that benefit from exports.

“The Chinese government has been saying for more than 20 years that there had to be a shift from investment-driven to consumption-driven in terms of where the Chinese economy gets most of the growth boost,” said Mr. Chen. “After having said this for 20 years, not much progress has taken place.

“Unless privatization really takes place of assets and state-owned businesses,” he added, “it’s very, very difficult to make private consumption play a bigger role in the Chinese economy.”