Three reasons investors may be losing faith in China’s economy

Beijing—For decades, Chinese economic policymakers have drawn praise for keeping their economy growing strongly through turbulence, such as the Asian financial crisis of 1997-1998 and the worldwide financial tumult of 2008. But investors have begun to lose faith in Beijing’s economic management for a few reasons, including:

Stock Market Debacle

As China’s economy slowed, the government decided to deploy the stock market to ease the pain. State-run media talked up stocks and individual investors responded by buying shares and igniting a 150 per cent run-up in the Shanghai Composite stock index in the year through June. The hope was that Chinese companies could issue shares into a rising market and use the proceeds to shrink debts.

But the stock bubble burst mid-June. Shanghai stocks plummeted 37 per cent. Government intervention proved futile, suspending trading in hundreds of companies and banning big investors from selling stakes for six months. The intervention undermined Beijing’s pledge to give market forces a bigger say in the economy and left policymakers looking clumsy and ineffectual.

Bungled Devaluation

On Aug. 12, China surprised investors by marking down the value of its currency, the yuan. The government said it was responding to market forces: Investors had signalled the yuan was overvalued. But skeptics worried that the devaluation was a desperation move to jolt the economy, a sign the economy was weaker than thought.

The move followed a report that exports had plunged in July. A cheaper yuan gives Chinese companies a price advantage in foreign markets. Since the devaluation, China has intervened to keep the yuan from falling too fast, confusing markets and renewing doubts about Beijing’s commitment to market forces.

Murky Statistics

Chinese economic statistics have long been viewed as dubious. Premier Li Keqiang once acknowledged that the statistics on economic output were “man-made” and worthless. China’s watchers tended to shrug off the uncertainty as long as it was clear that the economy was booming.

But now there’s concern about what’s really happening. Economists are looking at alternative measures of economic performance, such as electricity consumption. The London firm Consensus Economics asked several economists for forecasts based on the unconventional measures. These forecasters saw the Chinese economy growing just 5.3 per cent in the year up to the fourth quarter of 2015. Conventional forecasts have the economy growing closer to seven per cent.