Global stock market turmoil

Xi's plan for new economic era in China goes off the rails

Chinese President Xi Jinping delivers a speech during the World Internet Conference in east China's Zhejiang province on Dec 16, 2015.
Chinese President Xi Jinping delivers a speech during the World Internet Conference in east China's Zhejiang province on Dec 16, 2015. PHOTO: AFP

HONG KONG (NEW YORK TIMES) - When China's President Xi Jinping convened a group of top officials to discuss the economy last month, the highly publicised meeting was seen as a moment of triumph.

A stock market plunge last summer, and a messy currency devaluation that followed, had faded from global view.

In the relative calm, he seemed to usher in a new era of economic management, promising policy coordination at the highest levels to prevent another bout of turmoil.

Less than three weeks later, his plans have been derailed as China's stock market and currency once again rattle investors around the world.

At every turn, his efforts to manage the economy, market and currency have been undercut by global headwinds and haphazard policymaking. Initiatives last week, involving currency depreciation and stock market rules, have been particularly discordant.

These were hastily suspended after China's stock market plunged on Thursday morning.

Mr Xi also cannot move forward on the bolder actions needed to head off a more serious economic slump, such as forcing hopelessly indebted state-owned enterprises to stop borrowing money and shut down.

The Chinese leader's options are also more limited than in the past. He and his aides engineered the elevation of the yuan to the ranks of the world's leading currencies. But in doing so, he is allowing market forces to play a bigger role.

In the past couple of years, China had begun allowing companies and people to invest more overseas. Doing so helped reduce deflationary pressures, and increased China's influence around the world.

But money leaving China to buy houses and other overseas investments has become a flood. The central bank has responded by trying for the past three weeks to slowly guide the currency down as a way to help bolster exports and also make overseas investments seem more expensive.

The result has been chaotic. With the yuan worth less by the day in global markets, capital flight has been faster and worsening the currency turmoil.

Regulators last week also put in place a circuit-breaker mechanism that halts trading when shares fall too steeply.

Another measure banning large shareholders from selling stock was supposed to expire on Friday. The looming deadline prompted smaller investors to dump shares.

The resulting stress drove share prices in China down 12 per cent last week. The fall would have been steeper if the new rules had not shut down the market repeatedly.

In a stark about-face, China's stock market regulator on Thursday night said it would suspend the new measure "to preserve market stability". It also extended the selling ban for another three months.

A version of this article appeared in the print edition of The Sunday Times on January 10, 2016, with the headline 'Xi's plan for new economic era in China goes off the rails'. Print Edition | Subscribe