Can China Defuse The Panic Over Its Economy? by Knowledge@Wharton
Jacques deLisle and Peter Conti-Brown on China’s Economic Crisis
Concerns over China’s slowing economy that sent global stock and commodity markets on a recent free fall are heightened by the opacity and conflicting signals from the country’s political leadership and its central bank. While the markets recovered somewhat in subsequent days and the panic ebbed, the obstacles China faces remain along with their implications on the global economy. Those issues have cast a cloud over the prospects of a widely expected interest rate hike by the U.S. Federal Reserve in September.
China responded quickly to the stock market meltdown on August 24, dubbed “Manic Monday.” It lowered interest rates by 25 basis points to 4.6% and cut the reserve requirements for banks by 50 basis points to 18%, a move that is expected to increase liquidity by 650 billion yuan or about $101 billion. Those moves followed attempts two weeks ago by the People’s Bank of China (PBOC), the Chinese central bank, to let market forces play a bigger role in setting the value of the yuan, leading to a surprise devaluation of around 2%, which would boost Chinese exports.
China is able to dig deep into its foreign exchange reserves — the world’s largest at $3.65 trillion as of July 2015 based on Chinese government data — to manage the yuan’s value. But Peter Conti-Brown, Wharton professor of legal studies and business ethics, wondered how much of the reserves China could use and how long they would last. “Before they go through those resources, we will see a dramatic panic” about China’s ability to sustain the yuan’s value, he said.
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