The other day while I was crossing the street in Beijing, a car almost flattened me. Both the driver and I were outraged at the other’s ineptitude. In China, if you want to avoid being hit, you keep your head down and avoid eye contact with the oncoming driver, since looking at him would signal that you saw the car and know you should let it pass. In the United States, the opposite rule applies: Making eye contact confirms that the driver has seen you and should yield to the vulnerable pedestrian.
Something similar is occurring now between China and global financial markets. Billions in renminbi and dollars could be lost while trying to untangle the lines of communication.
Chinese bureaucrats believe that they have the right to intervene in their country’s economy whenever they want, not only to promote certain industries but also to prevent sudden downturns and reduce volatility. Officials believe that they don’t have to defend or explain their decisions in real time to market participants. In fact, being opaque preserves their discretion to make changes on the fly.
This approach goes against the operating principles of global financial markets: clarity and timely transparency. Intervention should be the exception, not the norm.
The job of regulators should be to ensure a fair market, but China’s stock market is worse than a casino, as Chinese regulators’ goals and the basic rules of the game can shift without warning. With China’s housing market in disarray in 2014, authorities invited investors to shift their capital to the stock market and then took a series of steps to facilitate high returns. When the market started to nose-dive last summer, officials wouldn’t let the bubble that had inevitably formed fully burst. Instead they suspended trading for some companies, mopped up shares, ordered large shareholders not to sell and accused market analysts of spreading false rumors.
Regulators were at it again earlier this month, delaying the trading of stocks that had been frozen since last summer and even suddenly declaring that the market would temporarily halt trading if the Shanghai index rose or fell 5 percent. All this did was give investors just enough time to hit the sell button when markets restarted. About four days after it was started, this tool was abandoned without apology. Some investors have lost their shirts, but no regulators have lost their jobs.
China’s currency missteps have been equally maddening. The market suggests that the renminbi is overvalued because a strengthening or even stable renminbi is inconsistent with the country’s expanding debt burden and slowing economic growth. China’s central bank has taken some steps to liberalize the exchange rate, measuring the renminbi against a broader basket of currencies instead of the dollar. But because Chinese officials continue to publicly assert the renminbi is not overvalued, they are intervening daily to prop up the currency. And they have imposed a range of capital controls.
Based on my interviews, Chinese officials believe these steps are preserving economic stability and facilitating gradual change, while investors who see policies change constantly with little apparent rationale have had their confidence in officials’ ability badly shaken.
Frustration with China has prompted calls for a regulatory response. Some in Congress have long clamored for the Treasury Department to label China a currency manipulator and issue sanctions. Even Donald J. Trump has advocated for a 45 percent across-the-board tariff on Chinese imports. But given that China is not trying to depress its currency to make its products more competitive, penalties are not justified. Nor would they work; they might make Washington feel better, but American investors, producers and consumers would all suffer from the resulting tit-for-tat.
The Obama administration instead should take a page out of the human rights playbook and privately raise the harmful effects of interventionism and delaying liberalization with the Chinese every chance it gets until the message gets through. And if it does not, American officials should step before the cameras and let markets know how disappointed they are with China’s policies. President Xi Jinping claimed that last summer’s emergency measures were necessary to prevent “systemic risks” to China’s economy, but at a summit meeting in September President Obama essentially did nothing to push Mr. Xi on that issue publicly or privately, implying that the United States accepted this explanation and related policies.
China’s economic management should also be a central part of multilateral diplomacy. The Group of 7 and Group of 20 nations have issued general calls for flexible exchange rates, transparent market management and greater coordination of macroeconomic policies. But if Chinese interventionism continues to roil global markets, the conversation ought to become much more pointed. At a minimum, governments and world markets deserve far more detailed information from China provided in a far timelier manner than is now the case.
If the world economy does not want to be flattened by a Chinese state apparently unaware of how risky its actions are, then we may need to make the conversation about China’s markets much more public. The two sides may not see eye to eye, but no one should avert their glance.
Scott Kennedy is the director of the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies.