China’s Managed Markets

China’s Managed Markets


Steering Through a Slowdown


China’s Communist Party leaders say they’re learning to love free markets. The world’s starting to learn how much. With an economy sagging under the weight of a property slump and surging debt, the government is overhauling a financial system built to fuel runaway growth. Its stated method: Give markets a “decisive” role in setting prices and interest rates. Its unstated challenge: Doing it without exacerbating an economic slowdown, triggering panic in global markets or weakening the party’s 65-year grip on power. China’s epic stock market boom and bust over the past year revealed it frantically shifting course. The fiddling showed policymakers caught between the desire to embrace elements of capitalism and an instinct to shelve those reforms when things go wrong.

The Situation

The government stepped in to stem a rout of China’s stock markets in July by banning sales by major shareholders and arming a state agency with $400 billion to support prices, among other measures. It then backed away during another slide in August, sending stock markets around the world tumbling. The benchmark Shanghai stock index had more than doubled in a year as China lowered interest rates, and state-controlled media characterized the surge as an affirmation of President Xi Jinping’s economic policies. The same off-and-on controls are being used in other arenas. China devalued the yuan on Aug. 11 and said it would rely more on supply and demand to determine the currency’s daily government-set fixing to the U.S dollar. It’s facing a key test of its progress toward embracing market forces as the International Monetary Fund will consider whether to include the yuan as a reserve currency for global central banks later this year. China still managesthe exchange rate and limits on the amount of yuan that can flow in and out of the country. Most interest rates are now determined by market forces — except for the benchmark deposit rate — though the central bank steps in when the money market is hit by bouts of volatility. There are also efforts to extend a government lifeline to heavily indebted property investors, state-owned companies and local municipalities.