How China is perceived carries enormous weight
By John Authers
Over the next few days, the Financial Times will be holding a series of "Great Debates" in Beijing, Shanghai and Hong Kong, asking whether China will be a superpower in 2020.
Viewed from New York, it seems a strange question. The investors in what is still the world's biggest financial centre are acting on the assumption that China is already a superpower, if not a hyperpower. They have been doing so for some time. And perceptions are important: if people believe you are a superpower, they will let you behave like one.
The perception that China is a superpower is now deeply ingrained in US popular culture. Late-night comedy shows recycle jokes about the amount of money the US has borrowed from China. Conspiracy theories about the Chinese currency, which has been kept fixed against the dollar for almost two years now, and about Chinese foreign reserves are omnipresent. If China wanted, it could sell its Treasury bonds and crash the US economy, the theorists say - neglecting to mention that such actions would wreak deep damage on the Chinese economy as well.
It is plausible to view all the ebbs and flows of risk appetite of the past few years as emanating from China. A local bubble in Shanghai stocks accompanied the top of the global credit market, and it burst just before the world's stocks peaked in October 2007. Almost a year later, the Chinese stock market was the first to turn and then lead the world's markets out of their post-Lehman slump. With the Chinese authorities committed to aggressive new spending, and slashing the price of money, it appeared that at least one global economic superpower was able to respond to the crisis.
In the rally of 2009, countries and markets could almost be put on a continuum according to their exposure to China. Those who most benefited from Chinese growth, such as Latin American commodity exporters, or the countries on the Pacific Rim that export goods to China, have done best. Those in most direct competition with China have seen the least impressive rebounds.
World markets then ran out of steam and started to move sideways in the autumn, as China began, ever so slowly, to put on the brakes, with technical measures such as adjusting the reserves that banks were required to hold. This spoke to fears. The first was that China must at some point exit from easy money. This might be called the "business as usual" fear - traders never like the part of the business cycle when rates are rising.
The second, much greater fear is that China has created a bubble and is now trying to get that bubble to deflate gently. Few things are harder to do. But both in stock markets and real estate, at least when viewed from a distance, the risks seem real. Per capita spending on real estate has grown at 27 per cent a year during the past decade. Even when starting from a very low base, this sounds like a bubble.
The parallel with Japan 20 years ago is also discouraging. Then Japan, like China now, had an economic model that seemed unstoppable. It responded to the Black Monday market crash of 1987 with cheaper money - and suffered a market implosion a little more than two years later. All of this helps explain how Chinese fears helped halt the world stock rally in the autumn.
If there is an argument against China's status as a market superpower, it comes from the past few months. Stocks in Shanghai headed downwards in the summer and continue to lag stocks in the US, which have returned to full robust optimism in the past few weeks. Greece, and not China, has been the focus of investors' concerns during this year's sell-off and subsequent recovery.
Does this mean that China no longer preoccupies investors? No. The latest numbers from China suggest neither an acceleration nor an imminent collapse, which is reassuring. Its huge trade surplus is narrowing. The authorities appear to be preparing to let the currency appreciate a little, which is just what many in the west want. Retail property sales have dropped a little in the past few months, while the relatively subdued performance of the stock market at least suggests once more that prices are staging a calm retreat from bubble-like conditions. In short, those worried about a bursting Chinese bubble had reason for more hope in the past few weeks. That is a factor in returning global optimism.
None of this means that the risk of a bursting Chinese bubble has gone away. It remains a possibility, and if it were to happen, there would be every reason to expect a return to crisis conditions across the world. But investors now think China might, somehow, be able to make a bubble deflate slowly. That remains to be tested, but the belief in the country's economic superpower status remains firmly intact.