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China’s Crisis Responses Raise Costs – Analysis

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By Michael Lelyveld

China’s poorly executed responses to the economic downturn and the Tianjin disaster have raised doubts about the government’s competence and could deter investment, experts say.

In July, China’s regulators tried to control investors’ behavior in the stock market and aggravated the crisis with heavy-handed manipulations, leaving many with staggering losses.

On Aug. 11, the People’s Bank of China (PBOC) ordered a one-day devaluation of the yuan against the U.S. dollar, sparking fears of a global currency war when the currency continued to drop.

Days later, the government’s policies came under fire again when it restricted reporting on the toxic chemical blasts that swept the Binhai New Area of the port of Tianjin on Aug. 13, killing at least 129 and injuring hundreds more.

In each case, efforts to suppress public reactions did little to restore confidence and instead added to distrust.

On the economic issues, government attempts to keep a lid on the consequences of policy changes may have only caused pressures to boil over and increased volatility.

After the 8.5-percent drop in the Shanghai Composite Index (SCI) on July 27, some experts questioned the government’s competence in implementing market reforms as it froze trading in many stocks, threatened short-sellers and ordered funds to buy shares.

Analysts say pressures had been building for months with warnings of a speculative bubble before the first 5.9-percent fall on July 8.

But by trying to control the selloff, China’s authorities demonstrated that “the nation’s rulers have no idea what they’re doing,” New York Times columnist Paul Krugman wrote on July 31.

After a semblance of calm, the market reacted to economic concerns and the removal of controls with another 6.2-percent drop on Aug. 18, raising expectations of more interventions.

The SCI lost 11.5 percent in trading last week and another 8.5 percent Monday as investors reacted to “signs that Beijing’s policymaking has grown not only more erratic but less effective,” Reuters said.

On Friday, the China Securities Regulatory Commission warned it would “severely punish” major shareholders for selling in defiance of a six-month ban, state media reported.

“The initial impetus in many of these things is to move in the direction of the market, but only when the market moves in the direction that the leadership wants it to go,” said David Bachman, a China scholar and political science professor at University of Washington in Seattle, in a phone interview.

Virtual replay

The government staged a virtual replay of its regulatory reversal with its “one-off depreciation” of the yuan by nearly 2 percent, which the PBOC said was part of a new market-driven policy to determine exchange rates.

The shift, following an 8.9-percent plunge in July exports, was widely seen as a bid to restore China’s edge in trade, prompting predictions of a greater devaluation of as much as 10 percent.

While both the stock market and the currency moves can be traced to economic weakening, the PBOC showed little taste for letting the yuan find its market value, instead intervening as depreciation neared 4 percent. The limit has only added to concerns that the currency will be devalued again.

“Right now, the devaluation looks very tepid, and the reason people think there’s going to be more devaluation is because it was such a small move,” said Derek Scissors, a China economist and resident scholar at the American Enterprise Institute in Washington.

“This looks like a wimpy compromise,” said Scissors. “It’s a half-measure,” he said.

The currency and share scares have heightened concerns that the government’s official 7-percent economic growth rate has been greatly puffed up.

Scissors agrees with a widening consensus that actual growth has probably been around 4 percent. Indicators like electricity use have been flat or negative for months. Some reports have suggested that gross domestic product (GDP) is now in decline.

But beyond the pretense of high growth rates, a common theme linking the stock and currency interventions is the government’s distrust of markets, despite the reform agenda that President Xi Jinping advanced at the Communist Party’s third plenum meeting in 2013.

“The common thing in these wild policy swings is that China’s leadership keeps imagining that it can order markets around, telling them what prices to reach. And that’s not how things work,” Krugman said in another column on Aug. 14.

Stability and control continue to be higher priorities, bringing China’s hesitant version of market economics to a halt whenever its operation poses a risk.

Barring critical comments

Similar forces have been at play in the government’s response to the Tianjin tragedy.

Despite pledges of “transparency” in disclosing the dangers, damage and casualties, the authorities simultaneously blocked independent reporting and barred critical comments from social media networks.

“From the outset, the government has insisted that everything is under control, that the levels of toxic chemicals in the air and water are normal — despite the fact that there were hundreds of tons of highly toxic sodium cyanide on site,” The Washington Post reported on Aug. 17.

Two days later, under public pressure, the official Xinhua news agency began to give a fuller accounting of the chemicals and the owners of the warehouse where they were stored.

But the government has continued to control public access to information, treating disclosure as a risk and undermining credibility.

“Zero tolerance will be shown by the central government to online rumors, especially those stemming from breaking news,” the Cyberspace Administration of China said in a statement on Aug. 19, according to the official English-language China Daily.

“Accounts that posted violent pictures, negative comments about firefighters or that spread false information have been closed temporarily, but those that intentionally spread rumors have been shut permanently,” the paper said.

Restrictions on the free flow of information have only contributed to mistrust.

“There are clear signs that people are very upset about what’s going on and not sure who’s responsible,” Bachman said. “The typical news blackout and the spread of rumors, all of it feeds into this,” he said.

The government’s reflexive responses to the series of challenges seem bound to affect investment prospects in ways that go beyond the immediate production cuts of manufacturers that sustained losses in the Tianjin fire.

“When you’re trying to recruit your CEO … and they see these kinds of things on TV, or their family and relatives see this, they start to talk and think, should I really be going to China?” Chet Sheltema, regional manager at international consultancy Dezan Shira & Associates, told the Associated Press.

“Are they really the state-of-the-art economy we thought they were?” he said.

The issues of secrecy and safety have become part of the growing cost of the government’s fixation with stability.

“If you’re looking to get ahead in your corporation, you don’t see China as a step up these days, I think,” Bachman said.

Scissors argued that the crises will have an effect on China’s investment outlook, but only among those who held a unjustifiably rosy view of returns based on the country’s inflated growth reports.

“This is going to wash out the people who just wanted to blindly believe that everything would be about the same in China tomorrow as it is today,” Scissors said.

“That was never realistic, … but now you can’t believe it if you wanted to, because the Chinese are actively undermining that belief,” he said.

RFA

RFA

Radio Free Asia’s mission is to provide accurate and timely news and information to Asian countries whose governments prohibit access to a free press. Content used with the permission of Radio Free Asia, 2025 M St. NW, Suite 300, Washington DC 20036.

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