Whatever China’s policymakers do these days matters a lot, and not just to the denizens of the People’s Republic. On the contrary, for better or worse what happens in China has a powerful and often immediate impact on the rest of the world. True, it doesn’t take much for the world’s financial markets to have an attack of the vapours, but the events of the last few days provide a stark illustration of just how important China is to the global economy.
One of the more improbable nostrums of political life is that with great power comes great responsibility. It’s a nice idea, but one that is not supported by a great deal of evidence. Despite famously calling for China to act as a “responsible stakeholder” in the international system, the United States’ own record in this context doesn’t bear close scrutiny.
We are, after all, still collectively engaged in one of the biggest economic experiments in history – quantitative easing, aka, money printing. This policy was embarked upon because it was judged to be in America’s perceived national interests. Its intention was to pump liquidity into a still-fragile economy and put downward pressure on the American dollar. Significantly, it was done with little regard for its possible impact on other countries, especially the potentially volatile and vulnerable emerging markets.
Powerful nations do these sorts of things because they can. No-one can stop the US from acting unilaterally no matter what the collateral damage may be. Should we expect anything different from China, despite its claims of solidarity with the normally marginalised countries of the so-called developing world? Perhaps not.
And yet given that China is trying to position itself as a central player in both the existing institutional order created by the US, as well as its own vision of an alternative regime with China at its centre, the decision to devalue its currency cannot have been taken lightly. Officials at the People’s Bank of China must have understood that their actions would attract great attention and have significant economic and political consequences.
So why would China’s top leaders authorise a policy that would send such mixed messages about its international role and domestic circumstances? They must have realised that such actions would potentially reignite the so-called currency wars and raise questions about including the yuan in the IMF’s basket of currencies that constitute “special drawing rights” – a long-held ambition of China’s economic elites.
Under the circumstances it’s not unreasonable to infer that China’s leadership is so worried about the state of the domestic economy that it is prepared to wear some international criticism and reputational damage because the risks of not doing so are simply too great. The legitimacy of the Chinese government rests overwhelmingly on its ability to keep delivering economic growth and development. Xi Jinping recognises this and has apparently given his support to recent moves.
Whether a relatively minor adjustment in the value of the yuan will have much affect is quite another question. The downturn in domestic manufacturing, for example, is unlikely to be reversed by a marginal change in its competitiveness. Even more importantly and paradoxically, the local governments that have tried to shore up their deteriorating balance sheets by borrowing offshore will suddenly find the cost of repaying such loans has gone up markedly.
China’s communist leaders have proved themselves to be rather good at running a capitalist economy, thus far. But its very success may have ramped up expectations in unsustainable and dangerous ways. The recent gyrations in Shanghai’s stock market are the most visible manifestation of China’s version of irrational exuberance. The thousands of unoccupied apartment blocks across China are an even more tangible testament to the formerly irrepressible dynamism of the Chinese economy.
All of this matters enormously for Australia. It is not just the resource sector that has gone from boom to bust in the blink of any eye. China’s cannier investors are assiduously working to shift their – sometimes ill-gotten – wealth offshore, out of reach of Chinese authorities and an increasingly wobbly looking domestic economy. Australian real estate – even in Sydney – still looks comparatively cheap and safe.
All of this is contributing to increased capital flight from China. This may have major consequences for the likes of Australia.
While all this may create headaches for Australian policymakers, we shouldn’t be too surprised that their counterparts in China are putting domestic priorities ahead of possible international responsibilities. Even allies have been known to behave in this way. So why should we expect a notional strategic rival to act any differently?
In the absence of an international institution with the capacity to actually influence the behaviour of some of its more powerful members we should expect to see the continuing privileging of the domestic over the international. Despite growing economic interdependence and the undoubted benefits it brings, the prospects for effective collaborative economic management look as remote as ever.