China’s Unhappy New Year

The beginning of the year is always a slightly strange time in China. Although China uses the Gregorian calendar, the phrase “Happy New Year” is generally reserved for the beginning of its traditional lunar new year observance, anywhere from three to as many as six weeks later.

That was fitting this year, as no one was much in the mood to wish anyone a happy new year in Beijing in January. The Gregorian arrival of 2016 could not have been less festive in the world’s second-largest economy. On Jan. 15, the Shanghai Stock Exchange reached bear market status, closing down 20 percent from a recent high on Dec. 22.

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While Beijing usually prepares for international events by deploying a bag of meteorological tricks to ensure blue skies over its urban murk, now it is a deep economic gloom that China’s leadership wish they could blow away. The day after the bear roared in Shanghai, President Xi Jinping was set to welcome members of the Asian Infrastructure Investment Bank for its first official business meeting. The A.I.I.B. was created to rival the World Bank, which China considers a tool of the United States. The $100 billion financing institution is seen as a thumb in the eye of two nations that chose not to join as founding members—the United States and Japan—but the banks’ meeting in Beijing was overshadowed by concern for China’s economy.

Although domestic growth has slowed over the past two years, it was not diminishing manufacturing output that brought a chill to the mainland in early January. It was Shanghai’s volatile stock market and the government’s response to it. A shock in September saw trillions trimmed from the market’s value in a matter of days. The government made billions available to local brokerages, instructing them to buy back shares. Its interventions did not go unnoticed by investors overseas.

On two separate days in January, trading on the Shanghai Exchange was halted, with declines of 7 percent tripping a loss-reducing circuit breaker implemented after the September drop. Chinese regulators removed the circuit breaker, deciding it was doing more harm than good, and the market seemed to calm before declines continued into Jan. 15’s bear market level.

Even as its political system and handling of religious affairs drew consistent criticism, for almost 40 years China’s management of its economy has drawn rapturous praise from the West. But the latest news, which has had a choppy ripple effect on bourses all over the world, brought out not only the bears but also the wolves. An unsigned opinion piece in The Wall Street Journal on Jan. 7 said: “Have China’s leaders lost the plot? With stock-market gyrations, a weakening currency and mixed signals on reform, Beijing’s reputation for technocratic competence is depreciating faster than the yuan. This has global markets on edge, to say the least, as the likelihood of a ‘hard landing’ for the Chinese economy grows.”

A reality check may be in order. Despite the market roil and currency devaluation, China finished 2015 with an economic growth rate of about 7 percent; growth is expected to continue in 2016 at higher than 6 percent. Its growing middle class is having its first experience with anything approaching disposable wealth. China still has the world’s largest population, which, while demographically unbalanced, has just been given permission to become somewhat larger with the termination of the one-child policy in 2015. A resulting baby boom and all the spending that accompanies one are anticipated over the next few years.

While domestic infrastructure investment has slowed and both local government and state-owned enterprise debt has soared into the trillions of dollars, China seems in little danger of losing its high perch among states of global economic importance. No other nation can approach the size or value of its markets for goods and services, which even after more than three decades of investment and development still has potential to grow.

When a shower of firecrackers and pyrotechnics mark the next lunar new year on Feb. 8, this Year of the Monkey will make an entirely appropriate arrival—a year characterized by intelligence and aggression, but also mischief and recklessness. China’s leadership will need to model the former and prevent the economy from behaving like the latter.

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