I don’t doubt that some investors expected the Chinese government to defend stock prices but, for the life of me, I can’t figure out how the government could possibly succeed in so doing; I know of neither mechanism nor precedent. Of course, the government will do something. It will engage more easing – most likely in the form of reduced reserve requirements for banks – and that might go some way to settling investors. But it won’t sustain asset prices for long. And besides, the Chinese government has far larger fish to fry.
China’s economy is slowing. That’s not necessarily a bad thing. In fact, it’s something of a necessity if policymakers are to be successful in re-balancing the Dragon economy toward a more sustainable model – away from debt-fuelled investment on the one hand, toward higher household spending driven by rising incomes on the other. The alternative is worse – economies with over-sized investment tend to slow too, ultimately, but in a much more dramatic fashion. And that would be a disaster for the one party, in a one-party system, whose legitimacy is founded on lifting living-standards. So, the period of transition that China faces is a very difficult one indeed. Success, if it is successful, will be hard won.
In the meantime, China’s slowdown comes at a bad time for the global economy. Brazil and Russia are in decline, so too is Japan and the euro-zone is struggling to escape the doldrums. It seems a great many investors were counting on China – which, according to the Wall St Journal, ‘accounts for 15% of global output but has contributed up to half of global growth in recent years’ – to maintain some momentum.
That was always a dangerous assumption.
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