China’s Market Slide Turns an Economic Crisis into a Political One

With Wall Street reeling from China’s slowdown, President Xi Jinping’s upcoming trip to Washington might be a rocky one.


The Dow Jones industrial average won back some of its historic losses Monday, bouncing back from a 1,000-point loss at the opening bell after China’s main index shed 8.5 percent of its value. As the run on China’s stocks continued — down nearly 40 percent since June — White House spokesman Josh Earnest made clear the near-financial meltdown has a very political component.

At a press briefing Monday, Earnest sought to assure Americans that China’s economic slowdown would not impact U.S. economic growth. He also used the occasion to take a swipe at officials in Beijing, who have been trying to artificially manipulate China’s economy in an attempt to stop an equities free fall.

“Improving transparency into their economy is something we believe will be good for the global economy — and also good for the [U.S.] economy and China,” Earnest said. “They should continue to pursue financial reform to increase exchange rate flexibility and to move rapidly toward a more market-determined exchange rate system.”

“That is a case that we have continued to impress upon the Chinese as being a priority of the United States,” the spokesman also said Monday. “Certainly, there will be continued discussion about China’s efforts to move towards a more market-determined exchange rate for their currency.”

By the day’s end, the Dow closed down 588 points, or 3.57 percent.

President Barack Obama, Treasury Secretary Jack Lew, and the International Monetary Fund have long urged China to allow market forces to determine the value of its currency and traded stock. China flirted briefly with these kind of reforms earlier this month, when it allowed the renminbi to “float,” or let supply and demand determine its value.

But those changes were short-lived. Officials at the People’s Bank of China only allowed the renminbi to float for three days. The central bank has also infused billions of dollars of liquidity into China’s financial system — $90 billion was pumped in last week alone, the largest amount in almost 19 months — to stimulate financial growth. But these efforts have proven fruitless; on Monday, the Shanghai Composite Index had its worst day since 2007.

That marked “a disastrous result for China, after working so hard to breathe life back into domestic equities after the 2007 crash and having spent hundreds of billions of dollars propping up the market since June,” Angus Nicholson of IG Markets said in a research note.

Now, as Chinese President Xi Jinping prepares to visit Washington next month, experts warn tensions over China’s meddling in its markets are rising. Coming on the heels of recent allegations of cyberattacks on U.S. targets by Chinese hackers — including the theft of personal information on tens of millions of federal workers — and Beijing’s continued push to build airstrips in contested areas of the South China Sea, the much hyped visit could turn into little more than a frosty photo opportunity.

“The relationship is not on good footing,” Scott Kennedy, a China expert at the Center for Strategic and International Studies, told Foreign Policy on Monday. “Xi is coming to Washington, and it’s not going to be a very happy visit. It’s either going to be a cotton candy-level summit — lots of empty calories — or it’s going to be a train wreck.”

“The atmospherics around the summit are already not very good,” added Andrew Small, a fellow at the German Marshall Fund of the United States. “Conflicts on all fronts are intensifying.”

Financial damage around the world in the wake of China’s continuing equity slide was widespread, but early concerns about a “Black Monday” proved unfounded. Germany’s stock index, the DAX, closed down 4.7 percent, and the FTSE 100 in England dropped 4.67 percent. However, it sent oil prices to lows not seen since 2009.

But as the chart below shows, damage to the Dow was limited, despite the historic loss of more than 1,000 points; the index had never shed more than 800 points in a day. In terms of percentage lost, Monday’s session doesn’t come close to other historically bad days on Wall Street, including the stock market crashes in 1929 and 1987.

That doesn’t mean the global impact from China’s slowdown isn’t real. The Bloomberg Commodity Index has put the price of products like oil, coffee, and cattle at their lowest levels since the end of the 20th century, in part due to waning Chinese demand. Emerging markets, which rely on China to import their goods, are especially vulnerable to China’s continuing slowdown, warned Dominic Rossi, chief investment officer for equities at Fidelity Worldwide Investment.

Kennedy said Chinese egos suffered the greatest loss in Monday’s bloodletting. As the world economy sank into the Great Recession in 2008, China was a beacon of growth. That fueled China’s confidence as it emerged as the second-largest economy in the world. Now, however, it’s becoming clear that intervention by Beijing is not enough to stop outside economic forces from savaging its economy.

“They have a lot of debt to overcome that they accumulated to avoid the global financial crisis,” Kennedy said. “A lot of that money went into real estate that’s sitting empty. That’s a big chain to drag up the hill right now.” Case in point: Beijing’s debt load is more than double the size of its gross domestic product, according to Bloomberg.

Small of the German Marshall Fund said that China’s slowing economic growth puts the country’s officials at a “weaker, less self-confident position than they were just a couple of months ago.… They look regressive, slowing down on some of the reform moves they said they were making.”

The IMF board will meet on Oct. 9. It has long insisted that the renminbi float as a condition for China joining the euro, the Japanese yen, the pound sterling, and the U.S. dollar in the IMF’s Special Drawing Rights currency basket, an international reserve fund meant to back up national coffers. Now, as economic forces continue to rock Beijing, officials there are faced with a choice: Do as the IMF and the United States want — and risk further economic damage — or continue desperate interventions in what could be a futile attempt to stop the free fall.

So far, Xi has chosen to do the latter.

Photo credit: Feng Li/Getty Images

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