Months of struggling with economic problems at home and bickering with President Donald Trump over trade are starting to take their toll on China’s financial health.

China’s stock market has now fallen close to levels not seen since a crash shocked global investors three years ago. An elite Chinese think tank affiliated with the government warned this week that the chances of a financial panic had risen significantly, shaking markets even more.

Chinese officials are trying to help factories deal with US tariffs by weakening the value of the country’s currency. That makes Chinese goods more competitive abroad, but it also gives investors inside and outside China a reason to take their money out of the country. And it offers Trump an opportunity to criticise Beijing – in the past, he has railed against the country for weakening its currency.

The chances of a financial collapse that could shake the world are slim. The Chinese government has vast sums of money it can tap in the event of a crisis. And there are steep financial barriers to keep money from fleeing the country. While investors have ways around the barriers, they limit the possibility that such a flight could bring one of the world’s most important growth engines to a halt.

"You don't know what Trump is going to do next," said Hong Hao, the chief market strategist in the international unit of ...
“You don’t know what Trump is going to do next,” said Hong Hao, the chief market strategist in the international unit of the Bank of Communications, one of China’s biggest banks. SUSAN WALSH

Nevertheless, China faces some increasingly serious economic challenges. It is trying to tackle its considerable debt problems without starving its economy of the money that keeps growth chugging along. The president’s tariffs so far have been quite small in the grand scheme of things, but they add to China’s troubles. The next wave of tariffs, set at 25 per cent, threatens to cover at least a tenth of China’s exports to the United States, and more could follow.

China’s stock markets reflect the uncertainty. The Chinese stock market as of this week is down more than 20 per cent from its January peak, making it a bear market. The country’s main stock index lost nearly 1 per cent on Thursday.

“You don’t know what Trump is going to do next,” said Hong Hao, the chief market strategist in the international unit of the Bank of Communications, one of China’s biggest banks. “Normally at this level, there should be a technical rebound.”

China’s moves with its currency reflect its difficult balancing act. The Chinese central bank has guided the currency steadily lower against the dollar, particularly in the past two weeks, as the likelihood of further American tariffs on Chinese goods has increased. The currency is down more than 5 per cent from its peak in February.

One indication of investor sentiment about China is the small amount of China’s currency that is traded outside its borders. China keeps the value of its currency in an iron grip, but investors in places like Hong Kong can trade it more freely.

The value of the renminbi has fallen somewhat faster lately in the less-regulated Hong Kong market than in Shanghai trading. A widening gap between the two markets has long been a sign that investors are worried about the currency.

China faces still more obstacles. The US Federal Reserve has begun raising short-term interest rates. That increases the cost of borrowing money for Americans and, given the vast influence of the US economy, for the rest of the world. Such rate increases have caused unpleasant economic surprises worldwide in the past, which could hurt China if growth slows in the markets where it sells its goods.

As if investors did not already have enough to worry about in China, a deeply pessimistic internal government analysis has widely circulated on social media this week. The analysis was written by Li Yang, the chairman of the National Institution of Finance and Development, a Beijing-based research group, and by three other economists.

A person who picked up the phone at the think tank said that the document was genuine and that its release had not been intended.

The document said that with “the Federal Reserve’s interest rate hikes and the long-term and highly uncertain trade conflicts between China and the United States, we believe that in China there is currently a high probability of financial panic.”

Other economists cautioned that the analysis should not necessarily be treated as representing a consensus view within the Chinese government.

Li has a reputation as being more bearish during financial crises than other Chinese government economists. He has also used periods of financial stress in China to oppose economic reformers who seek the opening up of the country’s financial system to greater competition and more international flows of money, Hong said.

The document leaked this week said that the way to prevent a financial panic was to create a separate stabilisation fund to prop up the currency, rather than selling dollars and shrinking the money supply. Such a move could help insulate China’s economy, because reducing the money supply makes it harder for families and businesses to borrow for purchases and investments, from buying an apartment to building a factory.

By contrast, many economic reformers say that China would benefit from more openness. The closed Chinese financial system tends to steer money to state-owned enterprises instead of smaller and more entrepreneurial private sector businesses.

Predictions by the report’s authors aren’t gospel, said Qian Qimin, director of wealth management research at Shenwan Securities, a Shanghai brokerage.

“They consider problems from a theoretical perspective and they look forward and alert government to the worst consequences, which is understandable,” he said.

by Keith Bradsher
The New York Times

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