By Clay Chandler and Eamon Barrett
October 20, 2018

On Friday, China’s financial regulators mounted an extraordinary media blitz to convince investors the world’s second-largest economy remains robust—and isn’t threatened by US tariffs or sky-high domestic debt ratios.

The assurances came as China reported third-quarter GDP growth of 6.5% year-on-year, the nation’s slowest quarterly expansion since 2009. They also followed a sharp sell-off in stock markets in Shenzhen and Shanghai Thursday which dragged the composite CSI 300 to 30% below its January high, its lowest level in three years.

Economic tsar Liu He vowed China would maintain stable growth, and chided bankers for their lack of faith in the nation’s private firms. “If you analyze China’s economy by focusing only on one thing or one period, you might feel it faces difficulty,” he said. “But if you look at it from a larger historical perspective, the outlook is very bright.”

Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, decried the market as “out of touch with the fundamentals of the Chinese economy” and declared that the performance of domestic bourses “does not reflect the healthiness of China’s financial system.” Yi Gang, governor of the People’s Bank of China, promised the central bank stands ready to provide liquidity for China’s banking system. Securities regulator Liu Shiyu said the government would take measures to facilitate private equity investments in listed companies, speed up merger approvals and support bond issuance.

The jawboning campaign seems to have done the trick—at least for now. Shenzhen and Shanghai indexes closed up more than 2% on Friday, while the Nasdaq-style Chinext index bounced more than 3%.

But skepticism abounds. “Talk is cheap,” sniffed Bloomberg columnist Shuli Ren. “Whenever China’s top banking regulators come out to calm the markets, you know their options are dwindling.” The Wall Street Journal’s Nathaniel Taplin warned Chinese regulators have a history of making “splashy announcements” followed by meagre economic stimulus. Hong Kong’s South China Morning Post fretted that China’s “experiment with capitalism” is “in crisis,” while the Financial Times warned that a continued China slump could spread to markets in the rest of Asia.

Beijing has allowed its currency, the renminbi, to weaken about 10% relative to the US dollar so far this year—nearly enough to offset the impact of tariffs the Trump administration has imposed on $250 billion worth of Chinese exports to the US. Many analysts worry that, to blunt the impact of Trump’s tariffs, Beijing will abandon its effort to purge its financial system of unprofitable loans.

The reality is that China is in a fix. Growth is slowing. Trade relations with the US may yet get worse. Beijing is reluctant to allow the value of the renminbi to fall much further for fear of being branded a currency manipulator and triggering a capital exodus. Throwing more money at inefficient state-owned enterprises will only erode long-term competitiveness. Bullish pronouncements notwithstanding, Xi Jinping and his economic advisors face difficult decisions in the months to come.

Clay Chandler


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