China’s 'system-friendly' response: A step toward global rebalancing?

By Nick Consonery

Beijing seems strangely unconcerned about the global market turmoil caused by fears of a second global recession. U.S. economic data over the past month has been disappointing, to say the least. The sharp sell-off in European markets at the beginning of the week hints that the continent's sovereign debt levels have become a persistent wound that rather than healing is developing a life-threatening infection. Brazil, meanwhile, unexpectedly cut interest rates to protect their domestic growth.

But rather than pulling out all the stops to prepare for another slowdown, the Chinese government is still taking steps to slow its own economy. The speed of yuan appreciation --which will make Chinese exports more expensive on global markets -- surprised markets over the past month. Beijing also hinted recently that it might take some steps to slow momentum in its domestic auto sector, even though it used subsidized auto sales to stimulate the economy in 2009. And Premier Wen Jiabao reiterated his government's commitment to inflation-fighting last week, meaning that liquidity will remain constrained in China, further restricting growth.

There are several theories to explain China's unexpected behavior. One is that the Chinese government is actually feeling a bit more confident about global growth than some of its peers in the developing world. Another is that Beijing has no choice but to continue tightening, given ongoing concerns that the economy is overheating and driving inflation. A third is that shifting politics in Beijing are facilitating economic reform.

The truth is that all these factors are in play.

From a global perspective, however, this is a big change. In 2008, when it faced the global financial crisis, Beijing pegged its currency to the dollar and rolled out a massive stimulus package. This response maintained rapid economic growth in China, kept Chinese citizens employed, put a floor under global commodity demand, and allowed many emerging market countries to benefit economically by satisfying Chinese demand.

But it did little to move the global economy onto more sustainable footing by achieving any kind of "rebalancing."

Contrast that history with today's realities. The policies implemented by China over the past few weeks are much more conducive to rebalancing. This marks a clear shift away from policies that are China-friendly and toward policies that are more system-friendly. China's leaders said as much in a white paper released on Sept. 7, in which they promised to "accelerate the shifting of the model of growth," which they predicted will "create great space for the growth of the world economy."

It is unclear how long this progress will go on. The yuan has weakened slightly in the past few days, and if there is any hint of a hard landing in China, Beijing's cautious leaders will surely stimulate the economy again to boost growth. But for now, Beijing's recent behavior is a positive for the longer-term sustainability of the international economic order. Let's hope it lasts.

Nick Consonery is an analyst in Eurasia Group's Asia practice.