HONG KONG — China’s bungled stock market bailout was a significant setback to its decades-long efforts to build a modern financial system.
Its currency devaluation shocked global investors and altered the policy calculus at central banks from Hanoi to Washington.
A highly anticipated package of overhauls to sprawling state-owned companies was a crushing rebuke to hopes that China would move to privatize such businesses. Instead of reducing their stakes, the Communist Party said it would increase its control over such companies.
To many global policy makers and investors, China’s spate of surprises is driven by the government’s need to get the economy back on track.
Growth is slipping. The latest data on Monday showed that the economy grew at 6.9 percent in the third quarter, its lowest level since 2009. And Beijing is scrambling to respond to the pressures.
While President Xi Jinping said the country was committed to financial reform, the resulting measures are sending the message that China is backpedaling on those efforts. It is a new and shifting landscape that is proving difficult for the rest of the world to navigate.
“People say reform is coming, but you’re giving back your reforms,” Fraser Howie, a longtime banker in Asia and co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise,” said of the recent actions by Chinese authorities.
“That defeats the whole purpose; you either embrace markets or not,” he said.
For years, the technocrats who control the levers of China’s economy have been heralded as farsighted planners. What they promised, they generally delivered, and any doubts could be dispelled by the nation’s torrid economic growth.
But that image has been shattered in recent months, as an expanding cast of agencies and officials regularly roll out ambitious plans with little warning and explanation. In China, economic decisions are treated like state secrets, forcing global investors and policy makers to adjust quickly.
The People’s Bank of China routinely surprises the market with major policy announcements on evenings and weekends. Its counterpart, the United States Federal Reserve, tries to telegraph its moves long in advance.
The situation is complicated by the competition and the lack of coordination among the many agencies charged with managing China’s economy. The central bank, securities regulator, Finance Ministry and economic planning agency, among others, have different agendas and goals.
The collective result is that it is difficult to discern exactly what is happening in China. From the outside, officials appear to be reversing course on long-held reform plans that are broadly considered critical for the health of the economy.
In June, China’s chief securities regulator outlined sweeping plans to expand the country’s financial markets. He wanted to help turn millions of cash-starved start-up companies into innovative corporate champions by making it easier to raise money and go public. The initiative would “strengthen the vitality of the entire economy,” Xiao Gang, the head of the China Securities Regulatory Commission, said at a financial forum in Shanghai.
With China’s stock markets tumbling a week later, he quickly reversed course, appearing to sacrifice his free-market agenda. Mr. Xiao’s agency banned new listings, barred big shareholders from selling and ordered brokerages to buy aggressively. While the movesultimately helped stabilize stocks, they also injected a major dose of uncertainty into the market.
“The stock-market rescue revived questions regarding the leadership’s commitment to economic liberalization and whether that is even what the administration means by reform,” said Matthew P. Goodman, a senior adviser for Asian economics at the Center for Strategic and International Studies who was an author of a two-year study on economic decision-making in China that was published in March. “It is now pretty clear that things are not going according to plan.”
The current pressures in China signal a reversal of the rosier outlook two years ago, when President Xi introduced a platform of financial overhauls intended to give the market a “decisive” role in the direction of economic growth. At the same time, Mr. Xi has aggressively asserted his primacy in driving China’s economic policy and reforms, an area that was traditionally overseen by the prime minister.
“The focus on centralizing authority has been a big theme of Xi’s, and also this more politicized and nationalist environment that Xi has inaugurated has had very clear effects on the progress of economic reform,” said Andrew Batson, the China research director at Gavekal Dragonomics, a financial consultancy in Beijing.
“That’s not necessarily 100 percent negative,” Mr. Batson added. “But it’s certainly not the universally pro-market reform agenda that some people were expecting.”
Confusion over the country’s commitment to financial reform and who is calling the shots on policy has resulted in increased volatility far beyond China’s borders.
For example, the surprise decision by China’s central bank on Aug. 11 to devalue its currency, the renminbi, prompted concern among officials in charge of monetary policy around the world, including in the United States.
China’s central bank explained its action as a one-time adjustment that was meant to make the currency, whose value had been tightly controlled by the government for years, more market-driven. But the suddenness of the move spurred competitive devaluations in Vietnam and Kazakhstan. The tumult emanating from China even prompted the Federal Reserve to hold off raising interest rates at its Sept. 17 meeting.
“I think developments that we saw in financial markets in August in part reflected concerns that there was downside risk to Chinese economic performance, and perhaps concerns about the deftness with which policy makers were addressing those concerns,” Janet L. Yellen, the Fed’s chairwoman, told reporters after that meeting.
Zhou Xiaochuan, the long-serving head of China’s central bank, has not commented directly on the devaluation. In a recent essay, Mr. Zhou argued that China had made impressive progress in financial overhauls over recent decades, but he also acknowledged that the global financial crisis and other factors had delayed some changes.
“Today the conditions are there to advance reforms for market changes, internationalization and diversification,” Mr. Zhou wrote in China Finance magazine. “But in this process, there are some things that require catching up, because there have been planned reforms that, owing to the crisis and other factors, were pigeonholed.”
For China, the risk in delaying promised financial overhauls is that longstanding economic problems could get worse. This is particularly true when it comes to cleaning up the trillions of dollars in debt that have been accrued by local governments across the country.
In October 2014, Lou Jiwei, the finance minister, announced a bold plan to clean up these debts, despite the crucial role that local government spending has traditionally played in China’s efforts to stimulate the economy. But as growth slowed further this year, policy makers appeared partly to backtrack, allowing local governments to continue adding new debt through riskier methods like borrowing through unregulated holding companies.
“Relative to the plan announced last year, the pace of reform now is slower,” Nicholas Zhu, a vice president at Moody’s Investors Service based in Beijing, said of the local government debt cleanup. “The reason is because the sharper-than-expected slowdown of economic growth since earlier this year has changed the policy focus more towards stabilization of the economy.”
The most recent development to set off doubts about China’s commitment to economic reforms came last month, when the government released a much-anticipated policy document on the overhaul of its gigantic state-owned sector.
A few days after the proposal was published, the Communist Party’s powerful Central Committee followed up with a document that bluntly ruled out loosening the party’s grip on state firms.
Party leadership “can only be strengthened rather than undermined, as state-owned enterprise reforms have entered the deepwater zone,” the Central Committee document said, according to a report by Xinhua, China’s official news agency.
The party leadership over state firms “is vital in ensuring the socialist direction of their development” and would “enhance their competitiveness and competence,” Xinhua added.
Despite signs of stasis on the ground, Chinese officials continue to talk up a pro-reform agenda in public, which adds to the murkiness.
On his visit to the United States last month, Mr. Xi, China’s president, repeatedly drove home his commitment to pushing through economic overhauls.
“The key to China’s development lies in reform,” Mr. Xi said in a speech in Seattle.
“When it comes to the toughest reforms, only those with courage will carry the day,” he added. “We have the resolve and the guts to press ahead.”
Text: The New York Times October 20, 2015NEIL GOUGH