China’s GDP Woes Crash Fed’s Jackson Hole Party

Not since 1997 have central bankers gathering in Jackson Hole, Wyoming been this worried about Asia.

The resumption of the Federal Reserve’s annual retreat in Grand Teton National Park signals something of a return to normalcy as the pandemic wanes. Until now, Covid-19 kept the Fed Bank of Kansas City from holding in-person conferences.

That all changes this weekend. Markets are on edge as Chairman Jerome Powell prepares to shed light on the Fed’s most dangerous inflation battle since the mid-1990s.

Yet written between the lines in bold font is what, oh what, is going on in Asia’s biggest economy—and what China’s rapid slowdown portends for officials from Washington to Tokyo.

No serious economist thinks President Xi Jinping’s economy will get anywhere near this year’s 5.5% growth target. In fact, the 0.4% expansion China eked out in the April-June quarter year-on-year suggests it will be lucky to get even halfway there.

China’s abrupt downshift is as self-inflicted as they come. The biggest, and most immediate, headwind is Xi’s obsession with massive “zero Covid” lockdowns. The policy is wildly out of sync with global efforts to adjust to more transmissible, but less deadly, coronavirus strains. The other is less appreciated: Beijing’s failure to recalibrate the Chinese growth engines when Xi and his team had the chance from 2012 to 2019, before the pandemic hit.

Now, as China stumbles, central bankers gathered in Jackson Hole are faced with their biggest Asia-related concerns in 25 years. That was back during my days as a Washington reporter, and I was in Wyoming in August 1997 when top monetary officials gathered amidst Asia’s financial crisis.

The crisis began in Bangkok in July 1997 when a too-strong U.S. dollar prompted the Bank of Thailand to scrap the currency peg and devalue the baht. The resulting chaos quickly pushed Indonesia into crisis and, later that year, South Korea, then a top-10 economy.

By the time Fed officials welcomed counterparts from around the globe to Jackson Hole, stocks from New York to London to Tokyo had begun to tank, too. One of the big worries then was that China might devalue the yuan. Thankfully, Beijing didn’t.

But flash-forward 25 years and China’s troubles will be the 800-pound economic risk in the room. Any discussion of how much further the Powell Fed will tighten links to how higher U.S. yields will affect China’s path toward 2023. The stronger the dollar gets against the yen, the more officials will worry Beijing might weaken the yuan, too.

China’s uncertain trajectory is a much bigger problem for today’s global economy than it was in the late 1990s. Back then, China wasn’t the largest trading nation or the generator of some $17 trillion worth of global GDP.

Suddenly, Beijing’s go-slow approach to fixing the country’s economic cracks these last 10 years is a clear and present danger to the economies of central bankers jetting into Wyoming this weekend.

Those seven pre-Covid years were an incredible window of opportunity for China to level the playing fields across industries. That’s particularly so in the years from 2012 to 2018, before then-U.S. President Donald Trump’s trade war upended global stability.

Early on, Xi talked a great game of raising China’s economic game. His pledge to let market forces play a “decisive” role in Beijing decision-making cheered global CEOs and investors. Yet then came the summer of 2015, when Shanghai stocks went into free fall.

That prompted China Inc. to circle the wagons as rarely before as stocks lost one-third of their value over a three-week period between July and August 2015.

Along with the People’s Bank of China slashing interest rates, Beijing cut reserve requirements and loosened leverage limits. All initial public offerings were shelved, while regulators halted trading in thousands of listed companies. Average Chinese were allowed to put up apartments as collateral so they could buy shares. Beijing rolled out marketing campaigns to encourage households to support stocks out of patriotism.

The episode seemed to deplete Xi’s confidence to make sweeping changes to China’s export-led growth model. Xi did put a couple of important reforms on the scoreboard. His team got the yuan added to the International Monetary Fund’s top-five currency basket. Xi also rolled out the “Made in China 2025” extravaganza. It’s a decidedly ambitious effort to own the future of artificial intelligence, biotechnology, electric vehicles, renewable energy, semiconductors and other key sectors.

Yet Xi’s need for greater control over every facet of life has overshadowed all else. Press freedom dwindled even further on his watch. So has government and corporate opacity. Xi’s sweeping crackdown on dissent and erosion of Hong Kong’s rule of law has “Asia’s world city” bleeding the talent that made it a top financial center.

Xi’s moves to take China’s most important innovators—starting with Alibaba Group founder Jack Ma—down a peg or two have global investors doubtful about Chinese tech. His chilling overreaction to U.S. House Speaker Nancy Pelosi’s visit to Taiwan shocked the world. Count the ways it’s backfiring, including lawmakers in Canada, Denmark and elsewhere now planning trips to Taipei.

These episodes and all too many others demonstrate why China’s leaders are unready for global primetime. And why central bankers resume their annual retreat in the Grand Tetons, China risks will dampen the party mood.