Bloomberg writes: For years, China’s leaders have wanted the world to acknowledge their economy’s leading role in the global system. This week they got their wish. Sadly, the circumstances weren’t ideal.
The crash in global stock markets began with gloom about China’s prospects and muddle over what the authorities in Beijing intend. Global markets may be calming down, but the confusion hasn’t gone away. The Chinese government and its critics all need to think a bit more clearly about what is going on.
In the past few days, China has been a whipping boy for everyone from Japan’s finance minister to U.S. Republican presidential hopefuls. Its central bank is accused of waging a currency war with its devaluation of the yuan two weeks ago. Before that, critics chided Chinese authorities for perpetuating a stock-market bubble by intervening extensively in equities; this week’s sell-off accelerated when the government declined to prop them up.
The world doesn’t seem quite sure what it wants from China’s leaders. Critics scold Beijing for boosting stocks, then panic when they don’t. They insist market forces be allowed to set the yuan, then howl when those forces push it down. They tell China to accept slower growth as the price of rebalancing its economy, then clamor then for stimulus when the economy slows.
To be sure, there’s confusion in Beijing as well. Leaders have promised to shift the economy onto a more sustainable growth path that’s based less on exports and more on services and domestic demand. But they’ve held to an unreasonably high growth target.
There’s an underlying tension in that mix: The leadership is sincere about its desire for markets to allocate capital more efficiently, yet mostly in order to preserve the power and position of the Communist Party. Party needs come first.
Beijing’s reluctance to surrender more fully to market discipline is understandable given the daunting list of challenges leaders face. But they’re only storing up problems for the future.
The government is paying the price now for having artificially boosted stocks earlier. The central bank is thought to be spending an estimated $40 billion a month to keep the yuan from falling further and prevent capital flight. Authorities are reportedly considering raising an additional $161 billion in bonds to fund new infrastructure projects. Some of these may make good sense, but the fact that Beijing is directing the program raises doubts..
More forthrightness now would buy China goodwill from markets when the government really does need to intervene — as the U.S., Japan and the European Union have all repeatedly judged to be necessary. Chinese leaders should remember that the currency that matters most is their credibility.
