This week’s spectacular crash of the Shanghai stock market tells us two things about China’s recent economic troubles: It’s less predictable, and less easily influenced by state intervention, than previously thought.
China’s most important stock index lost 8.5 percent Monday, the largest drop in the Shanghai exchange since 2007. Ouch. Worse: The selloff defied the government’s desperate attempt to prop up stocks and end days of market free-fall.
That’s because Beijing still hasn’t figured out what role it should play in its insanely volatile markets.
More broadly, Communist Party bigwigs struggle to square a circle: China has a top-down political system, but the secret to its fast-growing economy is its exposure to some measure of market freedom.
The global economy increasingly relies on knowledge industries. It’s the Internet, stupid. China can hope its entrepreneurs strive in a competitive market. Yet, the government wants to control their thoughts, so it continues to limit their access to the Internet.
No wonder no one expects the next killer app to come from China.
More importantly, there’s a ceiling to China’s growth, and we may have just hit it.
The Chinese economy this year is expected to grow by 7 percent — fantastic by our mature economy’s standards, but merely half of China’s 2007 growth, and sluggish compared to its 10 percent average in recent years.
We all must fear significant setbacks to China’s economy.
On Wednesday, the Janet Yellen-led Federal Reserve Board announced it would delay a long-expected rise in interest rates. China worries may have loomed large on that decision.
And then there’s the matter of Taiwan. Beijing considers that US-allied democracy, an economic powerhouse, as one of its provinces. It never retreated from the threat to annex the island by force. Yet, both Taipei and Beijing value their deepening cooperation.
That’s good news: Now Taiwan can explore Chinese markets, and China can further rely on Taiwan’s tech-based innovation to bolster its economy. Regrettably, that’s also the bad news.
That’s because 40 percent of Taiwan’s foreign trade is with China, by far its largest trade partner. Yet Taipei does everything it can to limit how much (and what) local tycoons can manufacture in China. “We’re not relying on trade with just one country,” Andrew Hsia, who handles cross-strait relations for Taiwan, told me recently over breakfast.
That’s an uphill battle: With common language, culture and history, Taiwanese businesses can do much more in China than their counterparts from other countries.
So it’s very tempting to move Taiwanese manufacturing to the “world’s factory” and to sell everything you can across the straits, to the world’s fastest growing consumer market.
Taiwan has learned to live with the ever-present and real threat from a bullying neighbor that wants to turn it into another Hong Kong, Macau or Tibet. But now it has to live with an even bigger fear: What if that miracle economy in the mainland is built on a bubble?
Emerging markets, including in Latin America, are early victims of over-exposure to China’s economic slowdown. Fears that China’s economic troubles will continue have driven down stock markets in South America as well this week.
And here’s the opportunity: This may be a moment for America to remind the globe of the real advantages of economic freedom and to demonstrate that true market economies create competition that drives progress.
President Obama tried to do just that this week in Africa, and more fundamentally with his Trans-Pacific Partnership trade pact, though it has languished.
China’s slowdown is a chance to prove wrong those who’ve long claimed that America’s days as the world’s sole superpower are over and predicted an endless Chinese rise.
But to do that, the next US president will first need to kickstart our economy and return America to its proper place of global economic leadership.