Instead of boosting economy there is danger China’s sudden move will hurt confidence
As the world responds to this week’s extreme andunexpected devaluation by the Chinese central bank, it sounds as if Beijing was taking the good doctor’s advice. And while the obvious intent was to snap the Chinese economy back to health, the frightening thing is that Beijing’s move smacks of desperation.
The modern equivalent of that Hippocratic maxim is: “Desperate times call for desperate measures.” As the Chinese currency and world markets took a dive, investors and trade partners around the world were asking themselves: “What does Beijing know that we don’t?”
Falling off a cliff. Chinese currency saw biggest one day decline in decades. (CBC news)
It’s not the first time this year that China has used strong government action to try to counteract inimical market forces. This spring, Beijing intervened, once to encourage stock markets to inflate, and then repeatedly in an attempt to stop the irresistible plunge when savvy traders realized stocks had become unrealistically high.
- Asian markets plunge despite measures to halt China meltdown
- China’s reminder that markets are never risk-free
The trouble is that markets do not like wild swings. And an economy that requires repeated radical intervention is one, like Russia, where no one knows what the government might do next.
Until recently, the fact that China was willing to back its own economy made it seem like an giant island of stability in a volatile world. In the darkest days of the great recession after 2007, China pumped money into its economy by encouraging borrowing and keeping the renminbi undervalued.
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