Can China pull it off?
A couple of weeks ago, the International Monetary Fund told the world that China was essentially doing O.K. It is “transitioning to a new normal,” the I.M.F. said in its regular economic assessment, toward “slower but safer and more sustainable growth.” The main risk, it argued, was that the Chinese government’s push for economic reform might prove “insufficient.”
It seems this is a pretty big risk.
Financial markets were shaken by China’s decision to abruptly devalue its currency on Aug. 11, days ahead of the publication of the I.M.F. report.
For all the I.M.F.’s assurances that this was a minor adjustment after a sharp appreciation of the currency until then, a welcome step that “should allow market forces to have a greater role in setting the exchange rate,” investors seem to have taken it as an unsettling signal that the Chinese authorities are desperate.
“The stumbling economy desperately needs a weaker currency,” wrote Diana Choyleva of Lombard Street Research. “Is this the start of a more flexible currency regime or an old-style devaluation?”
Nobody believes China’s official statistics anyway. What if the country’s economy is slowing faster than anybody knows? Developing countries — already reeling from the collapse of China’s demand for their raw materials — could feel the screws tighten further. And if China resorted to further devaluations to bolster exports and work itself out of an economic morass, it would undercut growth worldwide.
On Tuesday, after a 22 percent drop in Shanghai’s main stock market over three days, the Chinese government unleashed a new volley of measures to try to stop the slide, including cutting interest rates and reducing the reserve requirement on banks to stimulate lending again. This added to a rash of less orthodox interventions over the last few weeks, from encouraging borrowing to buy stocks to pledging billions to state-controlled banks to lend to favored projects.
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The aggressive actions by the Chinese authorities signal their growing concern over the country’s declining stock market and …Read More