Firecrackers and dancing dragons will welcome the Chinese New Year of the Red Fire Monkey in early February. The Monkey is one of 12 Chinese horoscope years that can predict wild success or portend catastrophic failure, depending on one’s level of superstition or gullibility.
One certain prediction this Monkey year: China is swinging toward interesting times.
Opaque markets, volatile stocks and moderating growth are just a few of the economic factors that will challenge China’s leadership and, consequently, global financial systems in 2016.
Suddenly, when China sneezes, the rest of the world may get the sniffles. Maybe even pneumonia.
For years, the Chinese economy was an impoverished, closed system that had no effect on the rest of the world. If the country ran out of iron rice bowls, it had no effect on the price of soybeans in Iowa.
All that changed when China opened up to the rest of the world in the post-Mao era, marked by the dramatic, global market oriented changes of Premier Deng Xiaoping.
Since the late 20th century, an economically supercharged export-oriented China has fed the world cheap consumer goods and, in the process, lifted hundreds of millions of Chinese out of poverty. It has been a win-win across the global board.
The upside for everyone is that China has integrated itself into the global financial system, started its own international development bank, tossed its currency into a financial reserve basket, sent its most promising companies in search of investment and capital in foreign stock exchanges, built ships and ports to transport goods around the world … the list goes on and on.
The downside is that any indications that Chinese growth is slowing, its banks tightening and its demand for energy subsiding has a disproportionately negative effect on Wall Street. And maybe even the price of soybeans.
Beijing’s leadership is playing it cool. Like the great and powerful Wizard of Oz, they implore the world not to pay attention to the man behind the curtain. But markets and investors are funny that way. They always try to get a peak behind the curtain.
It is not clear what they will see. The closed curtain hides real growth rates and the ruling Communist Party is surely more interested in self-preservation and promotion than in transparent corporate cultures within state-owned enterprises. Foreign investor wariness is warranted.
By the same token, no self-respecting capitalist counts out China or ignores its economic potential and enormous consumer market. The hard part is trying to get a real sense of where things stand. In the absence of reliable numbers and discernible trends, rumor and fear find fertile ground. Volatility ensues.
Economic uncertainties can only be exacerbated by simmering domestic and international political challenges, such as Taiwan’s recent national election that pauses the People’s Republic “One China” reunification goal.
China, however, is too big to flail. The last thing the United States or the rest of the world should want to see is an unstable or insecure China. But every market-oriented nation knows that it is subject to business cycles. China is not immune to this verity.
China may be entering its first real downturn with broader global consequences. If this is the start of a cyclical bump in the road, the question will not be whether China recovers – it will – but rather how will China react to economic problems and how will it adjust and change? And what will it mean for the rest of the world?
During the 2008 U.S. financial crisis, the Bush and Obama administrations directly intervened. The 2016 U.S. presidential election is partly about how America dealt with its crisis and ensuing recession; whether bank bailouts, industry regulation or income inequality.
Beijing will find and follow its own path to recovery. It must not, however, turn 2016 into the year of economic monkey business.
Markos Kounalakis is a research fellow at Central European University and visiting fellow at the Hoover Institution. Contact him at firstname.lastname@example.org. Follow him on Twitter @KounalakisM.