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Great Wall of China

The Chinese Economy’s Great Wall

The renminbi's recent decline, which has thrown Chinese stock markets into turmoil and drove the government to suspend trading twice last week, highlights a major challenge facing the country: how to balance its domestic and international economic obligations. The authorities' answer will have a major impact on the global economy.

WASHINGTON, DC – The recent decline in China’s currency, the renminbi, which has fueled turmoil in Chinese stock markets and drove the government to suspend trading twice last week, highlights a major challenge facing the country: how to balance its domestic and international economic obligations. The approach the authorities take will have a major impact on the wellbeing of the global economy.

The 2008 global financial crisis, coupled with the disappointing recovery in the advanced economies that followed, injected a new urgency into China’s efforts to shift its growth model from one based on investment and external demand to one underpinned by domestic consumption. Navigating such a structural transition without causing a sharp decline in economic growth would be difficult for any country. The challenge is even greater for a country as large and complex as China, especially given today’s environment of sluggish global growth.

For years, China’s government sought to broaden equity ownership, thereby providing more Chinese citizens with a stake in a successful transition to a market economy. But, like the United States’ effort to expand home ownership in the years preceding the 2008 crisis, Chinese policies went too far, creating a financially unsustainable situation that implied the possibility of major price declines and dislocations.

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