China: A Global Source of Risk or A Global Stabilizer

China’s economy is unique in the world for being both enormous and also rapidly and relentlessly growing. Like a jumbo jet with fighter plane performance, the Chinese economy can have a massive impact for good or ill far beyond the country’s borders. Several times in the past two years, policy shifts and missteps in China have brought volatility to what had been mostly placid markets. So is China at present a looming source of potential volatility or a bulwark of stability and counterweight to destabilizing forces elsewhere?

The good news for investors is that in the short term at least, China is a source of both macroeconomic stability and positive global risk sentiment. A variety of factors are contributing to China’s positive contribution to the benign conditions that have characterized global markets for most of the past 12 months. State-owned enterprises and other firms alike have reduced excess production capacity which has pushed up producer prices and shored up domestic revenues and profits. The weaker US dollar has also reduced pressure on the renminbi and boosted external liquidity. Above all, though, the greatest contributor to stability from China is the determination of its policymakers to maintain the momentum of economic growth even while they weed out pockets of excessive risk.

For China’s leaders, growth remains their top priority. They view it as indispensable to domestic stability, and a stable domestic environment in China also contributes stability to the global economy. The question is whether and how China can continue to sustain growth in the longer term. From the perspective of the Chinese government, it must and leaders have made sustaining growth a priority. At the 2010 Communist Party Conference, then-premier Hu Jintao announced the government’s goal of doubling GDP and household income by 2020. Achieving that goal would require GDP growth of 6.5% each year in the remaining years of this decade. Initial progress toward that goal was steady and strong thanks to China’s well-established role as an exporter of manufactured goods and expanding domestic consumption. Since then however, China’s policymakers have been challenged by changes in both the Chinese and global economies. Export growth has slowed, asset price bubbles have arisen and capital has flowed out. Despite these challenges, China’s policymakers are showing that they remain able to steer their country’s massive economy. They have imposed strict capital controls to limit the liquidity drain which has become a policy headache. They have also tightened property market regulations in some cities and price increases are slowing. Finally, stricter regulations on shadow banking and interbank borrowing are cooling risky, and leveraged, lending practices.

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