Home' Trinidad and Tobago Guardian : November 26th 2015 Contents BG20 INTERNATIONAL
BUSINESS GUARDIAN www.guardian.co.tt NOVEMBER 26 • 2015
For more than two decades the Chinese Com-
munist party has offered the masses an unwritten
social contract: we will manage the country and
allow you to get rich, as long as you stay out
Rapidly rising living standards and a bureaucracy that was
remarkably successful at achieving high rates of growth left
most ordinary citizens convinced this was a pretty good deal.
Most foreign investors in the country have been similarly
impressed by the competence of Chinese technocrats and their
ability to manage an increasingly complex economy that is
now the world s largest, at least in purchasing power terms.
But a stock market crash and a series of policy mis-steps
over the summer have left many investors questioning their
faith in the infallibility of the mandarins in Beijing.
Meanwhile, the relentless slowdown in the broader Chinese
economy that has been under way for the last few years appears
to be worsening, and deep-seated problems in the real estate,
manufacturing and financial sectors are becoming more acute.
As recently as two years ago, many Chinese officials were
still confidently predicting that the economy would continue
to expand at a steady rate of eight per cent for at least two
But China will grow at its slowest annual pace in a quarter
of a century this year as the Communist Party struggles to
achieve its full-year target of "around seven per cent" growth
in GDP. According to official statistics, the economy expanded
6.9 per cent in the third quarter from a year earlier, after
growing by seven per cent in the first half.
Tao Wang, the chief China economist at UBS, predicts growth
will slow to 6.2 per cent next year and 5.8 per cent in 2017.
"Downside risks (to these forecasts) will probably come
mainly from a deeper and more prolonged property destocking
process and a greater knock-on effect on the industrial sector,
and to a lesser extent, from insufficient policy support to temper
the downturn," she says.
"Either could aggravate the negative feedback loop in weak
real activity, worsening deflationary pressures and increasing
debt burdens; all against a backdrop of higher capital outflows
and financial market volatility."
Investors are unlikely to see any relief from China s enormous
export sector, which is struggling with weak global demand,
rising environmental and labour costs and a strengthening ren-
At the start of 2015, the government set a target of six per
cent expansion in total trade, but in the first 10 months of the
year China s trade with the rest of the world shrank eight per
cent from the same period a year earlier.
Woes in the export sector were one reason for the Chinese
government s decision to devalue the renminbi on August 11,
according to people familiar with the matter. But the shocked
reaction of global markets and the abrupt volte-face that
followed that decision probably did more to harm Chinese
leaders reputation for economic competence than anything
"The devaluation was clearly a policy mis-step," says Derek
Scissors, a resident scholar at the American Enterprise Institute
in Washington DC. "It seems they were completely oblivious
to the downside risk and how the rest of the world would
In fact, global investors had already been losing confidence
in the Chinese authorities for some time.
Around the middle of 2014 it became clear that the gov-
ernment had decided to encourage speculation in the country s
vast, but poorly regulated, equity market. By attaching its
imprimatur to a bubble the government believed it could
engineer a giant debt-for-equity swap as companies sold shares
to pay off some of the crushing debt that was harder to service
as growth slowed.
As the benchmark Shanghai index soared in early 2015 the
People s Daily, the official mouthpiece of the Communist Party,
crowed in a front page editorial that this was only the start
of a multiyear bull market. But barely two months later the
bubble burst and prices of equities, that had been driven
upwards by a flood of newly sanctioned margin trading, started
Beijing s knee-jerk reaction was a massive state-sponsored
rescue effort to buy stocks and stop the price falls. When that
did not work the government banned large shareholders from
selling any stocks. The market kept falling and eventually the
"national team" of state-backed stock-buying funds abandoned
their attempts to prop up prices but not before they had spent
more than $200bn trying to support the market.
"This was a huge hit to the government s credibility and it
just got worse with the failed devaluation attempt," said one
market participant with close ties to top financial regulators.
On August 11, the day the People s Bank of China---China s
central bank---announced its devaluation, several of the PBOC s
most senior officials were on holiday and had to be recalled,
according to several people with knowledge of the matter.
These people said the PBOC had proposed the move as just
one possible policy option and did not expect the central lead-
ership to adopt it so promptly. At first glance the announcement
appeared to be a master stroke.
In addition to a small "one-off" devaluation of less than
one per cent against the US dollar, the PBOC also said it would
now allow the market to play a much bigger role in setting the
exchange rate; a reform the IMF and many other institutions
had been urging for years.
That meant Beijing could devalue the currency to help strug-
gling exporters while also appearing to be complying with IMF
demands. Theoretically, this would not lead to competitive
devaluations from other countries and China would not be
accused of following a mercantilist policy. Over the next few
days investors pushed the value of the renminbi down by close
to five per cent, as Beijing had hoped.
But outside China s borders global markets and regional
Asian currencies were collapsing as investors worried about a
currency war amid fears the Chinese economy was in much
worse trouble than anyone had thought.
Within days the PBOC reversed itself and announced it was
heavily intervening in the market, essentially to re-peg the
renminbi to the dollar to try to calm panicky markets and
trading partners. "The government was very surprised by the
strength of the international reaction," said one senior adviser
to the Chinese leadership. "But once it feels it has sufficiently
stabilised the market then we will see some more devalua-
If this prediction is correct it will have a vast impact on
global companies and investors operating in or coming to China.
For years, the ever-rising value of the renminbi was as certain
and stable as the Communist Party s social contract with its
citizens and that meant a one-way bet and an extra attraction
for foreign investors pouring into renminbi assets.
Investors looking for a bright spot in China have pointed to
resilience in consumption and service sectors, which have held
up even as growth in investment, construction, manufacturing
and heavy industries has plummeted. The government has
encouraged this optimism by pledging to shift the Chinese
growth model from investment and construction to consumption
As growth slows and debt piles up the government s unwritten
contract with the masses---and with global investors---is looking
increasingly strained. AP
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