Not since 1997 have central bankers gathered in Jackson Hole, Wyoming, been so worried about Asia.
The resumption of the Federal Reserve’s annual retreat in Grand Teton National Park signals a return to normalcy as the pandemic wanes. Until now, Covid-19 has prevented Fed Bank of Kansas City from holding in-person conferences.
Everything changes this weekend. Markets are on edge as Chairman Jerome Powell prepares to shed light on the Fed’s most dangerous inflation battle since the mid-1990s.
Yet written between the bold lines is what is happening in Asia’s largest economy and what China’s rapid slowdown portends for officials from Washington to Tokyo.
No serious economist thinks President Xi Jinping’s economy will approach this year’s 5.5% growth target. In fact, China’s 0.4% expansion in the April-June quarter year-on-year suggests it will be lucky to even get halfway there.
China’s sharp slowdown is as self-inflicted as it comes. The biggest and most immediate headwind is Xi’s obsession with massive “zero Covid” lockdowns. The policy is totally out of step with global efforts to adapt to more transmissible, but less lethal strains of coronavirus. The other is less appreciated: Beijing’s failure to recalibrate the engines of Chinese growth when Xi and his team had the opportunity from 2012 to 2019, before the pandemic hit.
Now, as China stumbles, central bankers gathered in Jackson Hole face their biggest Asia-related concerns in 25 years. This was when I was a reporter in Washington, and I was in Wyoming in August 1997 when top monetary officials met in the midst of the Asian financial crisis.
The crisis began in Bangkok in July 1997 when an overly strong US dollar prompted the Bank of Thailand to remove the currency peg and devalue the baht. The resulting chaos soon plunged Indonesia into crisis and, later that year, South Korea, then a top 10 economy.
By the time Fed officials welcomed their counterparts from around the world to Jackson Hole, stocks from New York to London to Tokyo had also begun to fall. One of the big worries then was that China might devalue the yuan. Fortunately, Beijing did not.
But a 25-year flash-forward and China’s troubles will be the economic risk of 800 pounds in the room. Any talk of how much Fed Powell will tighten ties to how rising US yields will affect China’s trajectory to 2023. The stronger the dollar against the yen, the more officials will fear Beijing will weaken. also the yuan.
China’s uncertain path is a much bigger problem for the global economy today than it was in the late 1990s. Back then, China was not the biggest trading nation nor the generator of some $17 trillion in global GDP.
Suddenly, Beijing’s slow approach to repairing the country’s economic cracks over the past 10 years is a clear and present danger to the economies of the central bankers who are pouring into Wyoming this weekend.
These seven pre-Covid years have been an incredible window of opportunity for China to level the playing field across all sectors. This is particularly the case in the years 2012 to 2018, before US President Donald Trump’s trade war upset global stability.
Early on, Xi spoke of a big game to raise China’s economic game. His promise to let market forces play a “decisive” role in Beijing’s decision-making has applauded global CEOs and investors. Then came the summer of 2015, when Shanghai stocks went into a tailspin.
This prompted China Inc. to circle wagons so rarely before, as shares lost a third of their value over a three-week period between July and August 2015.
Along with lowering interest rates from the People’s Bank of China, Beijing cut reserve requirements and eased debt limits. All initial public offerings have been suspended, while regulators have halted trading for thousands of listed companies. Average Chinese people were allowed to put up apartments as collateral so they could buy stocks. Beijing has rolled out marketing campaigns to encourage households to support stocks out of patriotism.
The episode appeared to drain Xi’s confidence to make sweeping changes to China’s export-led growth model. Xi has put some important reforms on the scoreboard. His team had the yuan added to the International Monetary Fund’s basket of five major currencies. Xi also rolled out the “Made in China 2025” extravaganza. It is a decidedly ambitious effort to own the future of artificial intelligence, biotechnology, electric vehicles, renewable energy, semiconductors and other key sectors.
Yet Xi’s need for greater control over all facets of life has overshadowed everything else. Freedom of the press diminished even further under his watch. The same goes for government and corporate opacity. Xi’s sweeping crackdown on dissent and the erosion of the rule of law in Hong Kong has bled the “Asian global city” of the talent that has made it a top financial hub.
Xi’s moves to downgrade China’s most important innovators by a notch or two, starting with Alibaba Group founder Jack Ma, have global investors doubting Chinese tech. His chilling overreaction to US House Speaker Nancy Pelosi’s visit to Taiwan shocked the world. Count the blowbacks, including lawmakers from Canada, Denmark and elsewhere now planning trips to Taipei.
These episodes and more show why China’s leaders aren’t ready for global prime time. And why central bankers resume their annual Grand Tetons retreat, China-related risks will dampen the festive mood.