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The decline in the Chinese market has transformed the economic crisis into a political
Against the backdrop of fluctuations on Wall Street, due to problems on the Chinese stock exchange, Xi Jinping's early visit to the US may not be easy.
The industrial index Dow Jones somewhat came back to normal after the historic decline on Monday, amounting to 1000 points at the opening because of the loss of China's main stock index 8.5%. The continuing loss of the Chinese securities market - almost 40% since the beginning of June - forced the White House press officer Josh Ernest to declare that the financial meltdown includes a serious political component.
At a briefing on Monday, Ernest assured Americans that the problems in China’s economy would not affect US economic growth. He also took the opportunity to criticize Beijing, which is trying to artificially manipulate the economy of China in an attempt to stop the free fall of stock stocks.
“Increasing transparency in the Chinese economy is something that, in our opinion, should be a positive factor for the entire global economy, as well as for the US and China in particular,” said Ernest. “China should continue financial reform to increase exchange rate flexibility and move faster towards a more market-oriented exchange rate system.”
"This is a situation in which we try to involve China as much as possible, as it is a priority for the United States," the press attache also said. "Discussions of China's attempts to come to a system of exchanging its own currency more conditioned by market realities will undoubtedly continue".
The Dow Jones Index lost 588 points by the end of the day, or 3.57% percent.
President Barack Obama, US Treasury Secretary Jack Lew and the International Monetary Fund for a long time tried to persuade China to allow market mechanisms to determine the rate of currencies and securities. China has flirted a little with such reforms this month, allowing the yuan to "float", or rather - to give a bid and a proposal to determine its value.
However, these changes were short-term. Managers of the People’s Bank of China gave the yuan a "swim" for only three days. The central bank also poured billions of dollars of liquidity into the country's financial system — just last week, 90 billions of dollars, the maximum amount in almost 19 months — were pumped into the economy to stimulate financial growth. However, these efforts were in vain; Monday was for the Shanghai Composite the worst day since 2007.
In his study, Angus Nicholson of IG Markets writes that this was “a nightmare result for China, especially after the efforts that were made to breathe life into the stock market after the collapse of the 2007 year, and which since the beginning of June have spent hundreds of billions of dollars only to support the market. ”
Experts are now warning that friction over China’s behavior regarding its own stock market in preparation for the visit of Chinese President Xi Jinping to Washington may increase next month. Given the recent accusations of Chinese hackers in cyber attacks on the US - including the theft of personal data of tens of millions of federal employees - and Beijing’s attempts to build airfields in contested areas of the South China Sea, the much-anticipated visit can turn into something more than an opportunity for joint hostile photography.
Scott Kennedy, an expert on China at the Center for Strategic and International Studies, noted that US-China relations are on a weak foundation: "Xi Jinping is flying to Washington, and this will not be a simple visit. This is or will be a summit of "sweet cotton wool" - with a bunch of empty calories - or a complete catastrophe. "
"The atmosphere around the meeting is not very good," adds Andrew Small, an employee of the German branch of the American Marshall Fund. "There is an intensification of conflicts on all fronts."
Financial damage around the world due to the continuing decline of the Chinese stock market was serious, but early concerns about the repetition of Black Monday were not confirmed. The German DAX exchange index closed at -4.7%, while the British FTSE 100 lost 4.67%. However, oil prices fell to a minimum from the year 2009.
Despite the historical loss of more than 1000 points (the index never lost more than 800 in a day), the harm for Dow Jones did not become too serious. If counted as a percentage, then the Monday session cannot compare with other unsuccessful days for Wall Street, including market collapses in 1929 and 1987.
However, this does not mean that the global effect of China's problems does not exist. The Bloomberg Commodity index prices for such commodities as oil, coffee and cattle renewed the lows set at the end of the 20th century, in particular, due to a decrease in demand from China. Emerging markets that rely on China as a buyer of their goods, because of the slowing growth of its economy are particularly vulnerable, warns Dominic Rossi, in charge of investing in securities in the investment firm Fidelity Investment.
Kennedy also noted that China’s self-esteem was greatly shaken after the losses associated with the “bloodletting” that occurred on Monday. When the global economy plunged into the Great Recession in 2008, China remained a beacon - almost the only economy that grew. This fueled the country's confidence until it became established as the second economy of the world. Now, however, it is becoming clear that intervention from Beijing is not enough to prevent aggressive actions by external economic forces.
"It is necessary to overcome the serious debts that China accumulated in order to avoid a financial crisis," Kennedy added. - A lot of this money was invested in real estate, which is empty. This is a heavy load, which has to be dragged uphill. " The fact is that, according to Bloomberg, Beijing's debt is twice that of GDP.
Small from the German branch of the Marshall Fund emphasizes that slower economic growth puts the authorities in a “weaker position, where they are less self-confident than just a couple of months ago. They look regressive, slowing down the course of the reforms they promised to carry out. ”
The IMF Board of Governors will meet on 9 October. For a long time he insisted that the free pricing of the yuan is one of the conditions for entering the currency basket, which includes the euro, the Japanese yen, the pound sterling and the US dollar, which is an international reserve fund created to support the national resources of states. Now, while the economically powerful powers continue to press on Beijing, the Chinese authorities are faced with the choice: to do as the US and the IMF want - and to risk further economic problems - or to continue desperate interference in trying to stop the freefall of the stock market, which may well be futile.
So far, Xi Jinping has chosen the second option.