China: New Year, New Life

By Ricardo Rivera April 18, 2016

Translated from Spanish by Katarina Hall

rrivera@ufm.edu

 

The yuan’s devaluation against the dollar, the stock markets tumultuous start of the year, and unexpected reactions to new regulations from central authorities: this stumbling of the world’s second largest economy has not sat well with Xi Jinping, who already expressed dissatisfaction with how China’s Securities Regulatory Commission handled last year’s crisis. The stock market’s dismal start in 2016, along with the debut and suspending of the “circuit breaker” system, cost Xiao Gang his job—the very same man who designed it and who, until last week, was the Director of China’s Securities Regulatory Commission.

This change is important because it is part of a series of strategic movements the government is using to clean the Chinese economy. The last year has been tough for the Chinese economy, and has proved crucial for the central authorities’ decision: to leave the model of cheap exports and investments in infrastructure and head towards an economy directed by consumption and exposed to market forces. Through its spokesman, the Chinese Central Bank manifested its intention to increase consumption, and yet maintain precaution to not over expand credit. The changes seem to be a restructuring aiming to gradually end credit flow to zombie industries, in order to close factories that add to the already-installed overcapacity and to guide credit towards consumption and the service sector.

As a solution to the real estate clot in the arteries of the Chinese economy, the Central Bank reduced credit expansion. Furthermore, it reduced the bank’s reserve rate to previous levels, due to the banking system’s inefficiency to take credit to marginal sectors of the economy. However, the government adopted a new strategy to reduce taxes on real estate purchase. However, at the same time, it announced a cut in the credit flow to zombie industries, which include real estate development companies. This reminds us that while China’s housing bubble proved to be another “cry wolf” call, it is a matter that constantly remains in the horizon of regulators.

The 2015 crisis, the yuan’s devaluation, and the failure of the stock markets’ circuit breaker system in 2016, can only be explained as the result of the adjustment of market forces. The high level of control and interventionism by the Chinese government can, and should be, criticized, but it is indisputable that it is the same control and direction that led China to be more exposed to the open market. The new awakening of China is a difficult process that will need strong political leadership. Without a doubt, new reforms will come before dust settles on the previous ones.