Focus turns to US data as China slowdown looms

30 Aug 2015 | Author: | No comments yet »

Can Xi Jinping ride China’s market dragon?.

Oxford Economics said the disinflationary forces generated by a big downturn in the world’s second largest economy would keep inflation below the Bank’s 2pc target well into 2018.The collapse in Chinese markets has brought into focus a question that Western nations have been grappling with since the 2008 financial crisis: how much, if anything, stock markets have to do with the real economy.After a dizzying two weeks that saw a rapid plunge and rebound in equity prices, investors are looking forward to a week of economic data that may provide clarity on the likelihood of a near-term US interest rate hike and help tamp down the market’s recent wild swings.

Anyone trying to design an event to bring Xi Jinping’s China back to Earth couldn’t have engineered something much more elegant than the turmoil in China’s financial markets and the resulting global aftershocks.Since taking China’s top job three years ago, Xi Jinping and his administration have cloaked themselves in the mantra of “the Chinese Dream,” a feel-good mix of national rejuvenation and ever-higher standards of living.New York – A volatile ride for global markets this week ended calmly on Friday even as lingering worries over Chinese economic growth and the Federal Reserve’s plans to raise interest rates weighed on stocks, but oil rebounded sharply for a second day.

Its forecasts showed that, while a moderate slowdown was unlikely to hit Britain’s recovery, if growth in China slowed to an average of 4pc until 2020, from about 7pc over the past few years, the UK economy would grow by just 2pc next year, against a baseline assumption of 2.8pc. Warning signs that Chinese stocks were overheating have been clear for months, and the scenes of distraught retail investors losing their life savings as prices began to snap back in June barely made a ripple in global markets, until last week. Yet the jolt may have been just large enough to change the country’s underlying bargain between ruler and ruled—and by doing so, to temper Beijing’s current tendency toward arrogance, rigidity, belligerence and diplomatic hectoring. Back in April, state-run media encouraged ordinary Chinese and companies to grab their share of that dream by buying stocks — even though China’s economic growth already was known to be slowing. Inflation, as measured by the consumer prices index, would average just 0.9pc in 2016 and 1.3pc in 2017, according to Oxford Economics, against assumptions of 1.7pc and 1.8pc.

The Shanghai and Shenzhen brokerages were viewed as one step above casinos, with 80pc of the daily trading volumes coming from ordinary retail investors allowed to leverage up to the hilt on a state-sponsored bull run. If the week’s tumult has reminded Americans nervously eyeing their retirement funds of the interconnectedness of the global economy, it may also serve to remind today’s proud Chinese leaders that they too exist in a larger context—that they need their neighbours, that they need the US and that they might need to become a little more accommodating.

The equities “surge” became so tied to the China Dream that people called it “Xi’s stock boom.” Then came a white-knuckle roller-coaster ride. Its simulations suggest that Bank policymakers would be spurred to cut the base rate by 0.25 percentage points under this scenario to a new low of 0.25pc. Peter Fitzgerald, Aviva Investors’ head of multi-assets investments, said: “There’s a big difference between the Chinese economy and the Chinese stock market.

These dramatic falls, which followed a more gradual but still stomach-churning 11.5pc decline in Chinese stocks the week before, ripped through global markets. Global stock markets were stung by severe swings in recent weeks, stoked by concerns that a slowdown in China’s economy may be more harsh than anticipated. As President, Mr Xi has seemed pleased by his ability to seize and use power—to have China’s weaker neighbours genuflect and have the world respond more compliantly. After peaking in mid-June, the Shanghai Composite Index plunged nearly a third in less than a month — then rallied temporarily following government bail-out measures.

Those Fed officials who are anxious to raise rates said at an annual global central bankers’ conference in Jackson Hole, Wyoming that continued market turmoil may lead the US central bank to delay tightening monetary policy beyond September. America’s Dow Jones Industrial Average share index plummeted an unprecedented 1,000 points, before closing 588 down – its biggest decline for four years. But after confirming a move into correction territory, the S&P 500 rebounded to score its best two-day percentage gain in over six years this week, as comments from Fed officials led some investors to believe the market turmoil and global growth concerns had diminished the possibility of a rate hike at the central bank’s September meeting. A society that had grown accustomed to dismissing anyone it didn’t like—including the US—has been rattled by a marketplace that doesn’t know what obedience is.

Indeed, given our expectation that a world of weak Chinese growth would see UK inflation running at less than 1pc in 2016, the Bank may well be compelled to cut interest rates to try and offset disinflationary forces emanating from the East. But as Washington bickered, obfuscated and delayed, Beijing decisively injected $586 billion into China’s financial system, finally turning the nation into an engine of worldwide progress. Some City insiders have pointed to Beijing’s decision to devalue the yuan on August 11 as a warning that China’s economy was indeed slowing; others suggested disappointing data on manufacturing growth a week later was the trigger. Much of China’s growth in recent decades has depended on the cultivation of capitalism, but having implanted the quintessentially capitalist institution of stock markets in its midst, the Chinese Communist Party’s leaders have now been forced to confront a creature of their own making as it rises up and goes its own way, immune to their attempts to bend it to their will.

The move was the latest response by Chinese authorities, including the People’s Bank of China, to shore up the economy after they cut rates, lowered reserve requirements and injected liquidity into the banking system. Observers recommended its distinctive political mannequin — a hybrid of authoritarian politics and market economics — for giving its leaders the power and confidence to climate the worldwide monetary storm.

Others still have said it was the People’s Bank of China’s failure to intervene to prop up the market over the weekend of August 22-23, as it had done during previous wobbles, that finally unnerved traders. Traders in futures markets that bet on rate increases boosted September’s odds after his words. “There is a narrative out there that Yellen’s Fed is looking for a reason to delay the rate hike; I don’t think that is necessarily the case,” said Brad McMillan, chief investment officer for Commonwealth Financial in Waltham, Massachusetts. Stocks on Wall Street mostly edged higher at the close, as European equity markets did hours earlier, suggesting fears of Chinese contagion were overdone and that a US rate hike is not the end of the world, said Andrew Wilkinson, chief market strategist at Interactive Brokers in Greenwich, Connecticut. “It’s really a question of volatility having settled down somewhat even though it remains relatively high and people still view equities as being a decent place to be,” he said.

Mr Beck said the stock market tremors alone were unlikely to dent consumer confidence: “UK households’ direct equity holdings are fairly small, suggesting that the effect of the drop in the FTSE 100 on household spending will be limited. Such market gyrations have, more than at any time since the Lehman Brothers collapse in September 2008, raised fears of a renewed financial crisis, with all the related economic, political – and human – fall-out. After a stronger-than-expected revision to second quarter gross domestic product and solid durable goods figures, another run of strong data next week could bolster the case for a rate increase next month.

The free fall in the stock markets has been especially unnerving in a society over which the party has long pretended to ride herd—and has heretofore done well enough at creating economic growth that it had come to seem invincible and omnipotent. State media recently has hinted at significant opposition to Xi’s economic ambitions — especially the reform of China’s ponderous state-owned enterprises — and alarm that his team’s crowded agenda may have distracted focus from China’s worrisome economic slowdown. Policymakers in China are trying to shift the balance of growth towards domestic consumption and away from fixed investment in order to foster more sustainable growth. Considerations over the rout have now eviscerated $5 trillion from international markets, as buyers start to doubt whether or not Chinese language officers will be capable of hold the world’s second-largest financial system from hitting a “onerous touchdown,” its progress decelerating to about four% or much less. “What’s occurring is an act of desperation by China and it begins dragging down different nations with it,” stated Invoice Stoops, chief funding officer with Dragon Capital, a Vietnam-based asset administration agency with 90% of its $1.15 billion in native equities. “China’s police state financial mannequin is falling aside.” Specialists, buyers and Chinese language officers agree that for China to take care of robust progress and enter the highest echelon of world monetary powers, the nation should shed a few of its dependence on its export-led financial system in favor of 1 that is pushed by consumption and providers.

The PBOC was throwing “everything but the kitchen sink” at the crisis, with interventions in both equities and currencies, according to Andrew Polk, senior economist at The Conference Board, as the central bank seemingly tried to get out in front of the expectations of increasingly frazzled markets. But traders also are also mindful of the fact that the Chinese slowdown could hit US companies and their shares disproportionately in the second half of the year, with luxury goods companies and industrials among the groups paying a price. In a commentary that raised many eyebrows, various state media, including the website of the state-run broadcaster CCTV, recently criticized the “stubbornness, ferocity, complexity and weirdness of those who haven’t adapted to reform or are even opposed to reform.” It stated that the opposition “may go beyond what people imagine.” Yet even Xi, who since 2012 has consolidated his authority more swiftly than any other Chinese leader since the Great Helmsman Mao Zedong, could be in trouble if he’s no longer able to deliver the tradeoff that China’s mandarins have mastered for decades: fast growth in exchange for curtailed freedoms. Thomson Reuters data shows third-quarter earnings expectations have dropped 6.4 percent for the industrial sector and 8.8 percent for the materials sector since July 1.

Though China’s “socialist market financial system” has warmed as much as personal entrepreneurship in current many years, permitting e-commerce giants resembling Alibaba to prosper, a number of sectors — telecommunications, aviation and delivery, energy era and distribution, petroleum — nonetheless fall beneath complete state management. The New York Stock Exchange used its circuit breakers, installed after the 1989 crash, to pause stocks on 1,278 occasions on what was immediately dubbed Black Monday. While cutting interest rates for the fifth time in nine months, Beijing also tightened rules on short-selling, banned large shareholders from offloading stakes and forced local pension funds into domestic stocks. Enjoying torrid two-figure growth rates, China boasted urban skylines bristling with cranes and towering high-rise buildings while its countryside became laced with freeways, high-speed rail systems and wireless telecom networks.

A year and a half ago, the composite index of China’s once-placid stock markets—one in Shanghai where 831 companies are listed and one in Shenzhen listing some 1700—started its rapid and stratospheric climb, as if it had suddenly grown embarrassed by its relative languor. Earlier this year, when Chinese stocks reached frenzied heights, communist party censors further tightened their monitoring of media and internet content by instructing editors to not “exaggerate panic or sadness.

In January, Premier Li Keqiang stated the nation must “comprehensively deepen reforms” and “let the market play a decisive position in useful resource allocation to foster a brand new engine of progress.” China’s GDP is on monitor to increase maybe 7% in 2015, its slowest fee in many years. The reversal on Western markets, meanwhile, was largely driven by a senior Federal Reserve official hinting that an interest rate rise, previously signalled for September, is now “less compelling” given renewed financial volatility. By June, the Shenzhen market had risen by some 135 per cent and Shanghai by about 150 per cent, with a combined market capitalisation of more than $US9.5 trillion ($13,200 billion). But when Chinese language shares, already propped up by a government-backed bull run, started plummeting in June, authorities intervened with dramatic pressure.

A similar sentiment has spread to the UK, with investors betting the Bank of England won’t raise rates until October 2016 – six months later than expected just a few weeks ago. German bond yields edged lower, defying the sudden surge in oil, as data showed consumer prices in Europe’s biggest economy had been weighed down by falling energy costs. They lent large sums of cash to stimulate shopping for, cracked down on “vicious promoting,” and suspended buying and selling in additional than 1,000 shares. There is also now rampant speculation, which the Fed isn’t discouraging, that America will soon engage in yet another round of quantitative easing – so-called QE4. He’s grabbed the reins of a lot of economy policies — usually the responsibility of the prime minister — and heads a raft of smaller decision-making groups in charge of everything from foreign relations to the upcoming 70th anniversary parade celebrating victory over Japan in WWII.

The party’s own mouthpiece, the People’s Daily, exhorted “the broad masses” to join the feeding frenzy, claiming that China’s bull market was just beginning. However critics stated the federal government brought about confusion by “zigzagging” between intervening and never intervening, opening up and cracking down.

While there’s a history of authorities intervening in the markets, it’s tended to happen when values are very low and it was needed to support confidence. The Western world is similarly engaging in gross market distortion, albeit of a different kind – by keeping real interest rates firmly in negative territory and, once again, desperately stoking shares with the promise of further hundreds of billions of dollars of virtually printed money. When China’s stock markets finally started their hyperactive rise, one more cog in this well-oiled juggernaut of progress just seemed to be kicking into gear. For many Chinese, playing the stockmarket is tantamount to gambling in a casino, because of a lack of transparency, rule of law and adequate regulation. Call it “the China dream” (as Mr Xi does) or “socialism with Chinese characteristics” (as the party likes), but many Chinese were only too glad to proudly embrace this new vision of rejuvenation and prowess.

A lot hangs within the stability — as China has developed and its center class has grown, the nation has grow to be the world’s largest shopper of copper, metal, aluminum, cellphones, rice, tobacco, meat, coal and a laundry listing of different merchandise and commodities. American central bankers have been signalling for two years that the crisis-era programme of vacuuming up bonds from the market, known as quantitative easing, would be wound up as the economy improved. Having grown 9.8pc a year since the late-1970s, the economy of the People’s Republic now outstrips that of America on a purchasing power parity basis (adjusted for living standards). It was enough to make any foreigner envious, especially when so many Western economies lay like St Catherine, bound to a wheel of endlessly depressing cycles of capitalist boom and bust. Even this approach wasn’t enough to prevent the “taper tantrum” of 2013, when the markets took umbrage at the suggestion that the Fed would begin to tighten monetary policy.

In recent months, growth has slowed – with official forecasts pointing to a 6pc to 7pc expansion in 2015 and some analysts questioning the veracity of government statistics. Meanwhile, here was China, a country that president Bill Clinton once consigned to “the wrong side of history”, making a glorious end run around the verities of all the vaunted Western development theorists. The concept of a “state-mandated bull market” is dangerous, unsustainable and “naïve,” declared Caixin, a prominent financial publication, “it can easily become a ‘mad cow,’ spiking up and down.” New investors — many of whom nevergraduated from high school — were shocked to discover the hard way that officialdom won’t always ride to their rescue. “I don’t believe in government bailouts anymore,” said a 20-something Beijing woman who requested anonymity because she feared she might be punished for expressing such doubts, “Now there’s a big rumor that after the military parade on Sept. 3, all such bail-outs will stop. Verified email addresses: All users on Independent Media news sites are now required to have a verified email address before being allowed to comment on articles. China’s abrupt interventions have therefore come as a surprise to investors who have only recently gained direct access to the country’s A-share market.

After years of experimenting with what Deng once called “crossing the river by feeling the way over the stones”, China had seemingly arrived safely on the other side—and built not just a Chinese model but an economic perpetual-motion machine that had the added virtue of being patented in China rather than abroad. “The Chinese model has transcended the dichotomy between socialism and capitalism,” proclaimed Li Xiguang, a professor of media at Beijing’s Tsinghua University. “It has broken down the universe of discourse of the old market style of economy and proven that there is no singe narrative that is suitable for the whole world.” Mr Xi himself has sounded similar notes. “One part of the now long-standing Chinese leadership critique of Western-style democracy is that it is prone to paralysis and gridlock and ultimately governmental weakness,” he said in September last year in Beijing’s Great Hall of the People. Last week Prime Minister LiKeqiang repeated assurances that China’s 2015 growth target of around seven percent — the lowest in decades — was doable. When he met President Barack Obama in June 2013 at the Sunnylands Retreat in Palm Springs, California, Mr Xi proposed a “new model of big-power relations,” suggesting that Chinese success had bought it a seat at any geopolitical table. Officers in Taiwan, a democratically ruled island of 23 million individuals off mainland China’s southeastern coast that sends virtually 40% of its exports to its giant neighbor, lately slashed their 2015 financial progress goal almost in half, to 1.65%.

This confidence in the strength of the China model—and the supposed weakness of its Western competitors—has reshaped the way Beijing relates to the world. This worrying mix has underscored questions as to whether Xi’s team can manage a soft landing, especially since it hopes to restructure the economy to rely more on domestic consumption. Cho Shih-chao, Taiwan’s deputy minister of financial affairs, stated in an interview that China is following the trail taken by the island, going from low-quality manufacturing to extra excessive worth information business and providers. “This took 5 or 6 many years for us to succeed in this degree,” he stated. “China began in 1978 with [former leader]Deng Xiaoping and we now have to confess they’re choosing up fairly quick.” “The get together’s decision-making is absolute energy, which suggests [its]insurance policies … need to be obeyed by all totally different sectors, together with [the]enterprise group,” he stated. “So it relies upon, from what angle you take a look at this stuff. The more optimistic watchers point out that the US markets have just been through the third-longest period in the past 90 years without a major market fall of at least 10pc.

Having said that, China’s property market, which drives economic sentiment to a greater extent than equities and underpins the banking sector, remains buoyant. Its new confidence in its wealth and power has been matched by an increasingly unyielding and aggressive posture abroad that has been on most vivid display in its maritime disputes in the South and East China seas. China has claimed a protrusion hanging down from Hainan Island into the South China Sea like a giant cow’s udder, along the Vietnamese and Philippine coastlines all the way to Indonesia. However China’s recent stock market tumult has triggered aggressive governmentinterventions — including a freeze on IPOs and instructions for big players to buy stock — that run counter to those aims.

Some also sound a note of caution about the timing of the rout, during what is normally the height of the summer slowdown on trading floors around the world. The audacity of insisting that all the contested atolls and islands in the region are sovereign Chinese territory—and the uncompromising attitude with which Chinese officials pressed the claim—marked a more aggressive phase in Chinese foreign policy. State Division diplomat who labored at a Tokyo-based funding financial institution from 2000 to 2012, stated Japan’s financial system would in all probability survive the “China panic” intact. When asked if instituting reforms during this economic slowdown would be painful, Prime Minister Li said the challenges were growing more acute, not just like “clipping one’s toenails, but more like taking a knife [to one’s own flesh].” Meanwhile, Xi’s anti-corruption campaign aimed at snagging both “tigers” and “flies” — both senior and working-level officials, respectively — has been so aggressive that many fearful apparatchiks have adopted a risk-averse strategy of bureaucratic paralysis. He famous that China’s disaster had been brewing for years. “The Chinese language banking system is much more screwed up than was Japan’s after the collapse of the ‘bubble,’ and that’s no small feat,” he stated. “Once I labored on the U.S.

Nigel Brahams, a partner in financial services and markets at the law firm Fox Williams, said: “High-frequency trading doesn’t ultimately change the direction of the market but it accelerates and exaggerates it. A few analysts—mostly notably David Shambaugh, a George Washington University professor, in these pages in March—have warned that the centre of this new Chinese proposition cannot hold. Among the prominent “tigers” nabbed so far, Xi’s graft-busters have toppled Ling Jihua, former chief of staff to Xi’s predecessor Hu Jintao; two senior generals; and the former security czar Zhou Yongkang. Despite its apparent economic success, Professor Shambaugh argued, China was plagued by unresolved contradictions and headed for “a breaking point”. Some have quietly urged Xi’s team to focus more intently on the economic slowdown, rather than get sidetracked with the anti-corruption manhunt, according to a recent New York Times article.

It’s.” Talking in November 2008, one week after China’s Cupboard introduced its stimulus, then-President Hu Jintao referred to as the nation’s financial improvement “an necessary contribution to safeguarding worldwide monetary stability.” Even three years later, as China’s GDP developed at a blistering tempo, the state-run New China Information Company accused the U.S. of accumulating an excessive amount of debt and urged Washington to “reestablish the widespread sense precept that one ought to stay inside its means.” Throughout this week’s market decline, Chinese language state media editorials carried a strikingly totally different tone. “Proper now each nation is experiencing financial points,” stated the International Occasions, a nationalistic state-owned tabloid. UBS has crunched the numbers on a possible Chinese slowdown and has estimated that a 1pc drop in economic growth would knock up to 0.4pc from Europe’s output. If only those pesky emerging markets could run themselves properly, goes the Western narrative, then we would not have to endure the market volatility caused by their bad decisions.

Even though China buys relatively little from European trading partners, equating to about 3.1pc of overall exports, a slowing consumption of fuel, commodities and consumer goods might spiral into deflation further afield. The scandalous purge of Ling Jihua reflected most negatively on Ling’s mentor Hu Jintao, Xi’s immediat epredecessor as president and party head. (One of the first public hints that Ling was living beyond his means was a spectacular car crash that killed his son, who was driving a black Ferrari in the company of two young semi-naked women at the time.) But a more senior rival to Xi’s authority is believed to be Hu’s predecessor, Jiang Zemin, who was party head from 1989 to 2002 and continues to win respect as the dean of a “Shanghai faction” of leaders, despite his advancing age and uncertain health.

On Tuesday the European Central Bank’s vice-president, Vitor Constancio, tried to dampen anxiety over an economic slowdown in China, saying that the economy did not show signs of major deceleration and that Europe’s central bank stood ready to intervene if deflation reared its head. In 1998, an emerging markets crisis, starting in Thailand and then spreading across Asia to Russia, was indeed the catalyst for a significant downturn on global markets. Rumors whirled through Chinese social media after a stele adorned with Jiang’s calligraphy, which used to enjoy a prominent position at the party’s prestigious Central Party School in Beijing, was removed August 21. The collapse derived from chronic private and public sector indebtedness across such countries, many of which were in the throes of emerging from years of economic isolation.

The incident triggered speculation on social media — “why don’t they explain the reason for ‘the removal’? … There are games behind this! — and humorous references to “the toad,” a nickname for Jiang because of his prominent stomach and over-sized spectacles. Less than two weeks before the stele’s disappearance, an unusual editorial in the party mouthpiece People’s Daily warned that retired leaders should avoid the political arena and “cool off” like a cup of tea after a guest has departed.

It accused “some leading cadres” of creating a “quandary” for new leaders, “fettering their hands from doingbold work.” The reference is widely interpreted to mean Jiang, though he was never named. Particular correspondents Jake Adelstein in Tokyo, Ralph Jennings in Ho Chi Minh Metropolis and Nicole Liu in The Occasions’ Beijing bureau contributed to this report. But without the central banking might of Beijing, or its $3.65 trillion capital reserves, they are consigned to wait for signs of progress from within China. The annual Jackson Hole get-together this weekend has allowed the US authorities to drop more hints about what the China shudders might mean, with every morsel on inflation and interest rates carefully watched. The Communist government’s next five-year plan will be aired in October, with Premier Wen Jiabao’s desire to move more people into urban centres likely to continue unabated.

The plunge was all the more unnerving because it belied the party leadership’s conceit that their superior formula of governance could safely guide the economy through just such cyclical shocks. If we are on the brink of another “Lehman moment”, then it is the West’s response to the sub-prime crisis – above all, our continued reliance on growing debt and monetary stimulus – that must take a large share of the blame. This pretension had not only helped create a mythology of can-do omnipotence and invincibility around party leaders but also helped silence foreign critics of the slow pace of economic reform and the complete absence of political reform. Then there is the dark shadow that has long been cast over global markets by the potential unravelling of the grossly incoherent grand project that is Europe’s single currency. While popular among liberal-minded Chinese, he’s seen as China’s weakest prime minister in decades because Xi has concentrated so much decision-making power into his own hands. “[If Xi] really needs a scapegoat, then Li fits the bill,” says Willy Wo-LapLam, a sinologist at the Chinese University of Hong Kong.

In part, to demonstrate to the International Monetary Fund enough flexibility that Washington might deign to allow the yuan to be included in the official reserve currency basket. And on August 12, a chemical warehouse serving the port city of Tianjin blew up in a devastating explosion that incinerated whole lots full of export vehicles, demolished thousands of apartments, killed some 140 people and spewed untold quantities of toxic chemicals into densely populated neighbourhoods. Meanwhile, lower-level figures are already being questioned and detained in media, banking and regulatory organs for possible illegal stock-trading and rumormongering. For China’s leaders, the most profound problem with this string of events isn’t simply the monetary loss or the body count but the overall psychological effect.

Moreover, because the party leadership and central government purport to control so many aspects of Chinese life—from economics and financial markets to culture and politics—they get blamed first whenever anything goes awry. The PMI reading fell to 49.6, below the 50 mark that separates growth from decline, as market-watchers fret that property and industrial output have hit a wall. He’s called up an unusual military parade for September 3 to mark the 70th anniversary of Japan’s defeat, and for the first time Beijing has invited foreign troops to take part. For example Republican frontrunner Donald Trump has publicly suggested that Xi should be treated to “a Big Mac” instead of a state dinner at the White House, because Beijing has “sucked jobs … and all the money right out of our country.” If Xi’s image as a decisive world leader is sullied by perceived diplomatic slights, however minor, his critics back home will feel even more emboldened. Chinese may love aparade, but many are veteran cynics. “The big parade is useless,” groused one microblogger this week. “There are many more Chinese in poverty than there arein the parade.

Moreover your real strength may not be that great anyway.” Another dismissed the spectacle as a “goose-stepping performance meant to entertain the leaders … Can they really fight a war? In the China equation, a crack in the edifice of trust can corrode confidence in party rule and threaten the legitimacy of the state—one of the leadership’s biggest fears. But as the drama of recent weeks has shown, this double-barrelled challenge seems more complex than Xi’s team expected. “Reform has to address the politics and economy simultaneously,” insists Beijing-based political analyst Zhang Lifan, “If the political system doesn’t change, bureaucratic inertia will just send the reforms around in circles.” That may sound familiar to Xi — and he still clearly faces a long, hard journey ahead, before he can achieve his Chinese Dream.

Sometimes a crisis that shocks, even humbles, but doesn’t completely upend can catalyse a crucial moment of reflection that leads to reappraisal and even change. The most encouraging news out of this week would be for Mr Xi and his comrades to recognise that China can no longer be such an island—that China cannot succeed in isolation, much less by antagonising most of its neighbours and the US. But it also offers both countries a chance to work together on one of the greatest challenges of the century: forming a more effective partnership to tackle global climate change. But if China should take any larger message away from its near-death tangle with its own financial markets, it is that neither country—nor the world at large—has much hope of dealing with the century’s shared problems if Washington and Beijing cannot find more common cause.

Orville Schell is Arthur Ross Director of the Centre on US-China Relations at the Asia Society and co-author, with John Delury, of Wealth and Power: China’s Long March to the 21st Century.

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