HONG
KONG — China’s bungled stock market bailout was a significant setback
to its decades-long efforts to build a modern financial system. Its
currency devaluation shocked …
HONG
KONG — China’s bungled stock market bailout was a significant setback
to its decades-long efforts to build a modern financial system.
Its currency devaluation shocked global investors and altered the policy calculus at central banks from Hanoi to Washington.
A
highly anticipated package of overhauls to sprawling state-owned
companies was a crushing rebuke to hopes that China would move to
privatize such businesses. Instead of reducing their stakes, the
Communist Party said it would increase its control over such companies.
To
many global policy makers and investors, China’s spate of surprises is
driven by the government’s need to get the economy back on track.
Growth is slipping. The latest data on Monday showed that the economy grew at 6.9 percent in the third quarter, its lowest level since 2009. And Beijing is scrambling to respond to the pressures.
While
President Xi Jinping says the country is committed to financial reform,
the resulting measures send the message that China is backpedaling on
those efforts. It is a new and shifting landscape that is proving
difficult for the rest of the world to navigate.
Who’s Running China’s Economy?
Mixed policy signals from China have roiled global
investors. Here are five officials who are calling the shots in Beijing.
“People
say reform is coming, but you’re giving back your reforms,” Fraser
Howie, a longtime banker in Asia and co-author of “Red Capitalism: The
Fragile Financial Foundation of China’s Extraordinary Rise,” said of the
recent actions by Chinese authorities.
“That defeats the whole purpose; you either embrace markets or not,” he said.
For
years, the technocrats who control the levers of China’s economy have
been heralded as farsighted planners. What they promised, they generally
delivered, and any doubts could be dispelled by the nation’s torrid
economic growth.
But
that image has been shattered in recent months, as an expanding cast of
agencies and officials regularly roll out ambitious plans with little
warning and explanation. In China, some economic decisions are treated
like state secrets, forcing global investors and policy makers to adjust
quickly.
The
People’s Bank of China routinely surprises the market with major policy
announcements on evenings and weekends. Its counterpart, the United
States Federal Reserve, tries to telegraph its moves long in advance.
It
is all complicated by the competition and the lack of coordination
among the many agencies charged with managing China’s economy. The
central bank, securities regulator, Finance Ministry and economic
planning agency, among others, have different agendas and goals.
The
collective result is that it is difficult to discern exactly what is
happening in China. From the outside, officials appear to be changing
course on long-held reform plans that are broadly considered critical
for the health of the economy.
In
June, China’s chief securities regulator outlined sweeping plans to
help turn millions of cash-starved start-up companies into innovative
corporate champions by making it easier to raise money and go public.
The initiative would “strengthen the vitality of the entire economy,”
Xiao Gang, the head of the China Securities Regulatory Commission, said
at a financial forum in Shanghai.
With China’s stock markets tumbling a week later, he appeared to sacrifice his free-market agenda. Mr. Xiao’s agency banned new listings, barred big shareholders from selling and ordered brokerages to buy aggressively.
Graphic
Why China Is Rattling the World
China’s economy is faltering, prompting concerns that are now shaking global stock markets.
“The
stock-market rescue revived questions regarding the leadership’s
commitment to economic liberalization and whether that is even what the
administration means by reform,” said Matthew P. Goodman, a senior
adviser for Asian economics at the Center for Strategic and
International Studies who was an author of a two-year study
on economic decision-making in China that was published in March. “It
is now pretty clear that things are not going according to plan.”
The current pressures in China signal a shift from the rosier outlook two years ago,
when President Xi introduced a platform of financial overhauls intended
to give the market a “decisive” role in the direction of economic
growth. At the same time, Mr. Xi has aggressively asserted his primacy
in driving China’s economic policy and reforms, an area that was
traditionally overseen by the prime minister.
“The
focus on centralizing authority has been a big theme of Xi’s, and also
this more politicized and nationalist environment that Xi has
inaugurated has had very clear effects on the progress of economic
reform,” said Andrew Batson, the China research director at Gavekal
Dragonomics, a financial consultancy in Beijing.
“That’s
not necessarily 100 percent negative,” Mr. Batson added. “But it’s
certainly not the universally pro-market reform agenda that some people
were expecting.”
The confusion over the country’s commitment to financial reform has increased volatility far beyond China’s borders.
China’s
central bank has explained the devaluation on Aug. 11 as a one-time
adjustment that was meant to make the currency, whose value had been
tightly controlled by the government for years, more market-driven. But
the suddenness of the move spurred competitive devaluations in Vietnam
and Kazakhstan. The tumult even prompted the Fed to hold off raising
interest rates at its Sept. 17 meeting.
“I
think developments that we saw in financial markets in August in part
reflected concerns that there was downside risk to Chinese economic
performance, and perhaps concerns about the deftness with which policy
makers were addressing those concerns,” Janet L. Yellen, the Fed’s
chairwoman, told reporters after that meeting.
Zhou
Xiaochuan, the long-serving head of China’s central bank, has not
commented directly on the devaluation. In a recent essay, he argued that
China had made impressive progress in financial overhauls over recent
decades, but he also acknowledged that the global financial crisis and
other factors had delayed some changes.
“Today
the conditions are there to advance reforms for market changes,
internationalization and diversification,” Mr. Zhou wrote in China
Finance magazine. “But in this process, there are some things that
require catching up, because there have been planned reforms that, owing
to the crisis and other factors, were pigeonholed.”
For
China, the risk in delaying promised financial overhauls is that
longstanding economic issues, like the country’s ballooning corporate
and government debt problem, might get worse.
State-controlled
media reported on Monday that Prime Minister Li Keqiang had met with
the leaders of some of China’s biggest banks on Friday and issued a
broad promise to prop up companies in financial trouble. According to
the Beijing Times, Mr. Li declared that China “will not cut or withdraw
loans to those companies with difficulties but good market prospects,”
and will “give necessary capital support to companies undergoing
bankruptcies or regrouping.”
In
October 2014, Lou Jiwei, the finance minister, announced a bold plan to
clean up trillions of dollars of local government debts, spending that
has traditionally played a major role in China’s efforts to stimulate
the economy. But policy makers have appeared partly to backtrack,
allowing local governments to continue adding new debt through riskier
methods like borrowing through unregulated holding companies.
“Relative
to the plan announced last year, the pace of reform now is slower,”
Nicholas Zhu, a vice president at Moody’s Investors Service based in
Beijing, said of the local government debt efforts. “The reason is
because the sharper-than-expected slowdown of economic growth since
earlier this year has changed the policy focus more towards
stabilization of the economy.”
The
most recent development to set off doubts about China’s commitment to
economic reforms came last month, when the government released a
much-anticipated policy document on the overhaul of its gigantic
state-owned sector.
A
few days after the proposal was published, the Communist Party’s
powerful Central Committee followed up with a document that bluntly
ruled out loosening the party’s grip on state firms.
Party
leadership “can only be strengthened rather than undermined, as
state-owned enterprise reforms have entered the deepwater zone,” the
Central Committee document said, according to a report by Xinhua,
China’s official news agency.
The
party leadership over state firms “is vital in ensuring the socialist
direction of their development” and would “enhance their competitiveness
and competence,” Xinhua added.
Despite
signs of stasis on the ground, Chinese officials continue to talk up a
pro-reform agenda in public, which adds to the murkiness.
On
his visit to the United States last month, Mr. Xi, China’s president,
repeatedly drove home his commitment to pushing through economic
overhauls.
“The key to China’s development lies in reform,” Mr. Xi said in a speech in Seattle.
“When
it comes to the toughest reforms, only those with courage will carry
the day,” he added. “We have the resolve and the guts to press ahead.”
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