Implementing reform the key to calmer markets

PUBLISHED : Thursday, 27 August, 2015, 1:55am
UPDATED : Thursday, 27 August, 2015, 10:10am

Not long ago it was the US economy that everyone watched for signs of contagion. If America sneezed, the saying went, the rest of the world would catch a cold. Now it is China. Evidence of that came on Monday, when the Dow Jones Industrial Average opened an unprecedented 1,000 points down in a global wave of selling that began here and in the mainland.

By the time it reached Wall Street, it was conventional wisdom that fears about economic growth in the mainland were to blame for the rout. And if it was not that, then what about Beijing's devaluation of the yuan earlier this month? It all contributed to uncertainty and anxiety, with some even saying they saw signs of a repeat of the Asian financial crisis of 1997.

True, one perceived trigger for the sell-off was fear about slowing growth of the Chinese economy. But an underlying issue, instrumental in the turn of events, remains the quantitative easing programme launched by Washington, followed by Europe and Japan, in which financial assets were purchased to stimulate spending after the global financial crisis. It flooded markets with cheap liquidity that distorted the allocation of resources and was bound to end in a correction.

China itself has long been talking down expectations of growth rates to sustainable levels, with a greater role for domestic consumption. So it is difficult to see why fear about growth rates should be blamed for the rout. A look at the basics also makes it difficult to accept that Beijing's devaluation of the yuan has triggered a currency war. Since China began reforming its currency regime in 2005, the yuan has risen in value nominally by 30 per cent. The recent devaluation, aimed at allowing the markets a role in determining the value of the currency, totalled less than 4 per cent.

Now that the US economy is recovering, the days of rock-bottom interest rates are numbered. The US Federal Reserve has been expected to raise them as early as next month, although market volatility may result in a delay. In that regard, Beijing's move to cut rates and ease bank lending limits to try to stop panic selling of shares is timely. At the same time, Premier Li Keqiang has dismissed concerns about a further currency depreciation. That said, it is a fact that growth in China's economy is slowing. We live in troubled times in which we trust that policymakers push ahead with necessary reforms. Meanwhile, people need to exercise prudence.