One way to think about the recent financial turmoil in China is as a parenting dispute between “Xi Dada” and “Yang Ma” — meaning “Big Daddy Xi” (the nickname for President Xi Jinping) and “Big Mama” (a popular moniker for the People’s Bank of China.)
Dada and Ma are the two centers of power, political and economic, in a China that is coping with a painful new period of slower economic growth. They work in surprising harmony most of the time, but you could see the strain this summer as China struggled with a stock market freefall, and then, this week, a sudden currency devaluation.
Dada tolerates the free market, but he intervenes when it threatens the stability of his authoritarian political system, as in this summer’s stock-market panic. Ma defers to the Communist politicians, but keeps insisting (as the Chinese central bank did this week) that China needs a truly free market — for currency and everything else — to become a fully modern country.
The triumph of modern China is that it has kept these two poles in balance. But that’s getting harder. Xi wants the discipline the market provides for a corrupt China that has too many bad debts, but he also wants stability and central control that, in the end, are antithetical to topsy-turvy market capitalism. The central bank, for its part, insists that China can’t cure its economic imbalances without accepting global rules for currency and capital markets.
China’s central bankers defended the devaluation of the currency this week as a normal reaction to the country’s slowing GDP growth rate, which is officially pegged at 7 percent but is widely reckoned to be lower. “A fixed exchange rate looks stable, but it hides accumulated problems,” said Yi Gong, vice governor of the People’s Bank of China, at a rare news conference this week. That’s standard economic wisdom, and the International Monetary Fund, the global enforcer of economic orthodoxy, endorsed the Chinese move toward what Yi called a “managed floating-rate regime.”
But if you’re Big Daddy Xi, the free-market upheaval sits uneasily with what the party promotes as the “China Dream.” Xi knows that corruption and incompetence threaten party rule. But when it’s crunch time, he tends to intervene to protect the crony capitalism that has made party leaders rich. The government helped fuel the stock-market bubble, and then, when it burst this summer, moved to prop up prices and rescue some debt-laden enterprises.
A hint of the problems facing Chinese authorities came in a research note this week from Citicorp economists. According to a CNN summary of the Citi report, five Chinese provinces are now “thought to be in recession.”
David Smick, an economic consultant who advises some of the world’s leading hedge funds, argues that China is struggling with a long-term shift in its economy. Before the 2008 recession, he says, China had an export-led economy fueled by a cheap currency and recycled savings. When the global recession hit and demand for Chinese products collapsed, Beijing shifted to an investment-led economy that overspent on housing, commodities and industrial capacity. This created a bubble economy that the authorities tried to sustain with their own version of the Federal Reserve’s policy of “quantitative easing.” This week’s currency devaluation was a reality check.
“In any scenario where the dollar soars (say, if the Fed tightens) or the yuan weakens further (which seems a certainty) China’s dollar-denominated debt becomes problematic,” argues Smick. “We are at that stage now. A lot of people worry about coming defaults, or a series of disguised defaults, from China of dollar-denominated debt.”
Big Daddy and Big Mama have had an uncanny ability to stay on the tightrope, despite these problems. China’s skillful macro-economic management, combined with Xi’s strongman political tactics, have managed to co-exist. But recent events remind us of the underlying tension between free markets and unfree politics — and offer a warning that China’s straddling of these opposing views can’t continue forever.