Xi Jinping’s new year has begun with worrying echoes of the last one, facing another historic market sell-off. Only this time, the Chinese president’s headaches are compounded by global outrage over the nuclear bomb test by his unruly ally, North Korea.
Chinese markets have gotten off to the worst start in more than two decades, with the CSI 300 Index plunging 7 percent Thursday and triggering a full-day trading halt less than 30 minutes after the open. The circuit-breaker -- introduced in response to last summer’s $5 trillion equities rout -- was tripped for a second time this week, a day after North Korean leader Kim Jong Un detonated what the government said was its first hydrogen bomb, putting new pressure on Xi to bring his neighbor to heel.
China’s market regulator suspended the circuit breaker Thursday night.
The twin crises are opening what’s set to be a challenging year for Xi as he attempts to restructure the world’s second-largest economy, streamline bloated state-owned enterprises and confront a rapidly aging workforce. He’s also contending with angst among rival claimants to territory in the South China Sea and an escalating feud between two of the country’s largest suppliers of foreign oil, Iran and Saudi Arabia.
"Chinese leaders are going to be troubleshooting this year," said Hu Xingdou, an economics professor at the Beijing Institute of Technology. "This could be a critical year because the Communist Party will remain riven by domestic strife and lacerated by external disputes."
Chinese economic growth projections. (Source: IMF)
Xi is preparing for the National People’s Congress in March, when the government is slated to approve a five-year development plan to achieve annual growth of at least 6.5 percent through the end of the decade. The Communist Party chief is seeking a “new normal” of slower, steadier expansion dependent more on consumer spending and services than massive infrastructure projects such as airports and high-speed rail.
While Xi last year secured the yuan’s designation as a global reserve currency and raised his nation’s profile on the world stage with state visits to the U.S. and U.K., his handling of the market crash and concerns about the slowest economic growth in a quarter century raised questions about the government’s commitment to the market-oriented changes needed to guide growth lower.
"It was a surprise opening of a new year, and a lot worse compared to the beginning of the last year," said Chun Xia, a finance lecturer at the University of Hong Kong. "The government imposed artificial risks that made the global community go negative on the Chinese market. They didn’t have enough coordination before taking actions, but added uncertainties."
That pattern may continue. The stock market plunge on Thursday was fueled by the People’s Bank of China’s surprise decision to cut the yuan reference rate the most since August, effectively devaluing the currency and fanning fears the economic slowdown was deeper than official data suggests. The move was reminiscent of the August cut in the rate that roiled global markets on concern the decision would trigger a currency war.
Map of the explosion site, the Punggye-ri test facility in North Korea, and the region
The central bank’s decision to let the yuan weaken came after China spent billions in a bid to stem the currency slide. Data on Thursday showed foreign-exchange reserves fell more than forecast in December, capping their first-ever annual decline.
Before last year’s selloff, Xi was seen as China’s most powerful leader in at least two decades, having given himself direct control over economic matters as well as foreign affairs and national security. That image has been colored by the government’s whipsaw response to the market volatility. With stocks again melting down, international events are compounding Xi’s worries.
After North Korea’s surprise nuclear test Wednesday, Xi faces international pressure to rein the regime in. The two leaders have not met and Kim has rebuffed China’s calls to halt his nuclear ambitions. North Korea did not give China advance warning of the detonation, the Chinese Foreign Ministry said.
On Thursday, Xi led a meeting of the Politburo’s supreme Standing Committee that reaffirmed the party’s -- and thus, Xi’s -- leadership, according to the official Xinhua News Agency. The party "leads everything: politics, the military, the public, academia -- east, west, south, north and central," the body said in a statement.