Doubts abound on China’s economic leadership

Associated Press

WASHINGTON

The fear that gripped financial markets this month is a stark one: That China’s economy might be slipping into a decline that could persist for years.

But the world’s second-largest economy isn’t collapsing – certainly not yet, anyway. What’s really in freefall is confidence in its leaders, once seen as wielding near-mythic power to keep their economy growing at a propulsive pace.

Global stock markets have sunk – and gyrated – as investors have wrestled with their doubts. The Dow Jones industrial average has lost nearly 1,000 points since China’s surprise move to devalue its currency Aug. 11. That step, in part an effort to align the yuan with market forces, also was seen by investors as a desperate bid to fuel exports in a faltering economy.

“The incredible faith in the Chinese policymakers has been shaken,” says Ruchir Sharma, head of Morgan Stanley’s emerging markets equity team.

For all its woes, China still outruns every other major economy.

For 2015, while the nearly healthy U.S. economy will expand perhaps 2.5 percent, even most pessimistic analysts predict that China’s will grow at least 5 percent. Yet its growth has decelerated for four-straight years.

And a series of bungled decisions have escalated doubts about Beijing’s economic stewardship. The skepticism is rising just as China is pursuing one of the most-daunting transitions in modern economic history – from overheated growth, driven by exports and often-wasteful investment, toward slower and sturdier growth fueled by spending from an emerging middle class.

The leadership’s miscues have multiplied, starting with its handling of the stock market.

To try to cushion the pain from a slower economy, the government deployed state-run media to promote stocks for inexperienced individual investors. The hope was that Chinese companies could issue shares into a rising market and use the proceeds to finance growth and shrink their heavy debt levels.