Since the end of the Second World War, China’s economy has been gripped by tidal forces, pulling it into Gross Domestic Product (GDP) growth of 21.3% in 1958 and plunging it deep into recession with 27.3% of GDP shrinkage in 1961. The intermittent periods of extreme growth and recession were a trend for China throughout the Cold War. This instability was, naturally, attributed by the capitalist West to Chinese communism and its rigid, one-party political system. But the West’s zealous anti-communists were not graced with the data available today, which shows that China’s instability trended towards greater stability throughout the Cold War. Growth became more predictable, and shrinkage less frequent. China suffered her last bout of GDP shrinkage in 1976, shedding a manageable 1.6%. Since then, and much to the dismay of the anti-communists of old, China has enjoyed an average of 9.7% uninterrupted GDP growth. Despite this outstanding economic performance, China has deliberately been denied the endearing inclusion into the group of Asia’s ‘Four Tigers’. The Tigers are Taiwan, Hong Kong, South Korea and Singapore, and are known as such for their outstanding economic performance since the 1950s, becoming four of Asia’s leading economic powerhouses. There is, however, a notable difference between how China and the Tigers achieved their growth. The World Bank and International Monetary Fund (IMF), both sources of Western economic dominance, often give praise for the neoliberal economic policies of the Tigers in their reports, thus suggesting the means for China to earn similar praise. But China and her communist elite were never ready to relinquish control over their economy and emulate the West just for a bit of praise. China’s leaders, from Mao Zedong to Xi Jinping, have been perfectly content with being the hidden Dragon amongst crouching Tigers. After all, today the communist state accounts for 15% of the world’s GDP and half of global growth.
As China glanced cautiously over her shoulder towards the West, the country drifted further and further from a communist command economy and came to resemble those it had viewed with contempt – a free market economy. This provided the country with more stable and consistent economic growth, yet her command economy credentials remained largely in place. Government measures taken during the recent turmoil in the financial markets can attest to that.
The recent plunge in the value of China’s stock markets shook markets the world over. It became so severe upon the markets’ opening one Monday, 24 August 2015, that the day came to be known as Black Monday. However, Black Monday was not the earliest indication of market turmoil. The Shanghai Composite Index began venting value at accelerating speed on June 12, marking the first indication of possible market trouble in the near future. The Chinese government remained largely unconcerned and sought to boost the state’s sluggish exports with a surprise currency devaluation of 2%. The plunge in the markets was now accompanied by a decrease in the value of the yuan. Things got noticeably worse. China’s Shanghai and Shenzhen markets fell by 7% on June 26, prompting the state-controlled central bank to intervene by cutting interest rates, a move that normally has a positive effect on share prices. It didn’t. As mass sell-offs of stock and shares continued, the state sought to fill the void left by dwindling buyers. Brokerage houses were ordered to pump funds into the markets, other state funds were invested in companies to help their recovery, and the central bank made further funds available for investment in shares. The state also cut the number of possible share trading transactions in a given day and suspended new stock launches . Despite intermittent moments of market growth in the following months, these actions failed to prevent a massive plunge in market value.
Finally, Black Monday came on 24 August and was marked by the Shanghai market’s decrease in value by 8.5%, its worst single-day drop in eight years. The plunge caused a bout of contagion for world markets. Germany’s DAX had all of its 2015 gains wiped out. The Eurofirst 300 Index suffered its worst performance since 2009 and other European markets shed over 4% of their value. America’s Dow Jones opened down by over 1,000 points, though recovered later on. The devastating turmoil forced the US Federal Reserve to renege on a widely expected interest rates rise. Former US Treasury Secretary Lawrence Summers said that raising rates too early would be a “serious error”, predicting instead that the Fed may execute the increase in December 2015, or even March 2016 if the volatility continues. This uncertainty ended when the Fed increased interest rates for the first time in seven years on 16 December, by 0.25, with another such increase announced for March 2016. There are divisions amongst political leaders and economists that the Fed is increasing rates too soon, thus risking economic recovery. The move saw a divided reaction too; US markets rallied, the dollar remain unchanged, and oil prices plummeted.
Interest rates are an area of contention for economists throughout the West and Asia. When the 1997 and the 2008 financial crises occurred, central banks responded by cutting interest rates. In response to Black Monday, China too cut interest rates. However, economic recovery from the 2008 crisis remains largely elusive and Western central banks have exhausted their interest rate mechanisms, with rates very near zero or even negative. This means that option, or the transaction of a financial instrument at a given price and time, is not viable in the event of another financial crisis, leaving Western governments with greater restrictions in dealing with another financial fiasco. This could explain why the Fed moved aggressively to increase interest rates in December. By doing so, they will have some fiscal manoeuvrability in the event of another crisis. Instead of relying on fiscal tools, they rely on other major global players to tame instability, such as China. But China has notably failed to do so this time, despite having plenty more room to cut interest rates. Understandably, economists are nervous. They need not be too nervous however. China’s markets were opened to foreign investment relatively recently compared to other suffering markets, meaning the primary bulk of investors are Chinese citizens. The stark differences in investment cultures for China and the West became a conductor for the Black Monday crisis. Over 80% of investors in the Chinese stock market are private individuals seeking to inflate their wealth by taking advantage of China’s long term growing prosperity. It has paid off for many, as the number of millionaires in China is quickly rising, their ranks having grown by 2 million in 2014 alone. Though this offers opportunities of wealth to many, it also creates market bubbles which are notorious for bursting and wrecking economic havoc. However, this trend of investment largely confines the damaging effects of a market crash to China and, to a much lesser extent, her neighbours. Although the world’s biggest economies are closely interlinked with, and dependent on, China’s economic success, the ripple effect from Chinese economic malaise will be noticeable but not as severe as if such a collapse happened in the US or Europe.
Before the plunge, China’s markets had increased in value by approximately 150% since the beginning of the year as tens of millions of ordinary citizens invested in rising markets, some even borrowing money and taking out new mortgages in order to get a slice of the pie. This helped fuel market growth further and make it more attractive to new investors. Paradoxically, Chinese state involvement in the economy’s historic rise to world prominence has been a catalyst for attracting millions of Chinese citizens to invest in the market, but the recent collapse has burdened many with immense financial losses. This leads to the risk that political instability could develop, particularly if markets worsen further, which could threaten the government’s authority. As noted, the bulk of the loss is confined to China. World markets are already recovering from Black Monday, whereas Chinese markets are still fighting an uphill battle.
The Media Doomsayers
The market turmoil has been plagued by endless negative press, predicting a wide array of doomsday scenarios. Perhaps the most clichéd of them all is the argument that the turmoil resembled that of the 1929 Wall Street Crash which caused the Great Depression. Other accusations levelled at China suggest investors are largely looking for a scapegoat for the turmoil, rather than offering constructive criticism. China has been fiercely criticised both for intervening in the markets in an attempt to restore stability and for withdrawing support and allowing the markets to continue their decline. The Central Bank has been criticised for allowing a stock bubble to develop and for manipulating the yuan, thus allegedly rigging the markets in its favour. But the contradictory barrage of allegations don’t offer a rational explanation for the events that have unfolded. The criticisms are part of a wider concern that Chinese economic growth is slowing down much faster than the government is admitting. But how much attention should the world pay to China’s doomsayers?
Despite the recent market turmoil, figures show that China is not suffering quite to the extent that is being portrayed. For instance, the yuan, despite its devaluation, remains over 10% stronger now against the currencies of China’s trading partners than it did a year ago. The Shanghai Composite index, despite its massive fall in value, still boasts 43% greater value than a year before. Over all, Chinese markets have increased in value by 150% since the start of the year and have not had this value wiped out. Despite the apparent instability, shares consist of a relatively small proportion of Chinese wealth. The far more stable property market contains far greater investment. Ultimately, a repeat of the 1997 Asian financial crisis is unlikely (as is a repeat of the Wall Street Crash). Since 1997, currency regimes in Asia that instigated the crisis have largely been restructured with a floating-rate system, and China has relinquished much of its own currency controls after persistent harassment from US officials; Asian foreign reserves are much higher, and increasing; and financial systems are better managed in general. Yet, more frequently than not, journalists’ research failed to include such facts in their reporting.
As the media promoted scenarios of economic cataclysms, questions can be raised about their role in fostering investor jitters. Long before the market turmoil became news worthy, the primary media focus, also negative, on China’s economy was of ‘inadequate’ growth of 7.6%. Understandably, a slowdown in China’s economy is a matter of concern for other economies worldwide, but 7.6% growth, thus far attained comfortably, or even a forecast of 6.9% growth for this year and 6.8% for next year, are not cause to criticise China’s slowing economy. Media coverage like this illustrates attempts to turn China into a scapegoat for the economic woes that yet linger from the 2008 crisis, which was caused by financial malpractice in the US and Europe. Western investors have become unhealthily reliant upon the rising BRICS economies (Brazil, Russia, India, China, South Africa). Each of their economic statistics aptly profiles the direction the world economy is taking. Brazil has boomed in recent years, but a combination of political turmoil for President Rousseff and crumbling commodity prices, the country has entered into a deep recession with credit rating agency Fitch joining S&P in moving Brazil’s rating to junk status. Despite Brazil’s significant contribution to global growth in recent years, its recession is expected to continue into 2016. Russia has been one of the fastest growing BRICS members since the end of the Soviet Union with its GDP increasing by over 1000% since 2000. However, Russia has suffered a sharp recession and a plunge in the value of its currency, the ruble, due to a combination of US and European sanctions and tumbling oil prices. But the daamage appears to have been quickly contained as Russia secured significant economic deals with other developing countries, China in particular. Russia’s Economics Minister predicts Russia to return to growth of 0.7% in 2016. India is increasingly been looked to as the future leader of BRICS growth. It stands apart from the rest with the highest GDP growth of them all, with a downward revised growth figure of 7.5% for 2015 and a 7.8% forecast for 2016. South Africa’s GDP has more than quadrupled since 2000, despite suffering weaker growth this year. The South African treasury predicts annual growth of 2% for 2015 with modest increases to 3% by 2017.
With falling growth, the BRICS countries have shown they can no longer be relied upon to take on a disproportionate share of global economic growth. Brazil, Russia and South Africa have an economic performance little better than their Western counterparts. Indian and Chinese growth rates are at similar levels of approximately 7%, making them the lead contributors to growth in the global economy. The world’s Western economic powers are stuck in near stagnant growth, with only the US pushing to an average of 2% so far this year. The World Bank projected 2.7% growth for 2015 however the White House revised this down to 2% for the year, forecasting 2.9% in 2016. Instead of blaming China for going from 10% annual growth to 7.6% growth over the course of the last decade, Western leaders should be pursuing ways to contribute their fair share of world growth. But if the recent tirade of China-bashing by US presidential hopefuls is anything to go by, China will continue to simultaneously receive all of the blame for economic malaise and shoulder all expectations for positive global economic growth.