Commentary: China anxiety an unwarranted global malaise

After China's steep fall in stock markets touched off a global selloff on Monday, those who hyped about an imminent "collapse of China" years ago are now predicting "the great fall of China."

Their gloomy outlook has drawn much attention worldwide, given China's economic challenges in the current rebalancing period. But such skepticism over China's economic achievements is not new; only that part of the China distrust has now morphed into China anxiety.

Monday's turmoil in the global stock markets represents a remarkable trend: the global economy is closely tied to Chinese performance. When China sneezes, the world could catch a cold. When China thrives, the world has much to hope for.

One of the difficulties China faces in its rise, nevertheless, is mounting international pressure -- almost in every aspect. From macroeconomic management to private firms, the Chinese economy is being scrutinized for errors and loopholes. Some criticisms are well justified, but a lot are simply baseless speculations.

For example, the surprising devaluation of the Chinese currency, the yuan, two weeks ago was at first erroneously interpreted as a desperate effort to prop up China's GDP growth through exports. Some even projected an ensuing currency war, or competitive devaluations across the world. But the yuan quickly stabilized in three days.

As the Chinese central bank said, the move was just a step further in its exchange rate reforms. To make the exchange rate mechanism more market-oriented, the yuan needs to be cheaper against other major currencies. China's exporters would certainly benefit from the slide, but Beijing doesn't intend to boost up growth through exports.

The Chinese economy is in the middle of a significant transition. The old path of investment-led and export-driven growth is no longer viable. What China needs at the current stage is deeper structural reforms and a fairer say in the global financial system.

The "Black Monday" in the global stock markets witnessed a familiar overreaction to Chinese movements. Many investors panicked and rushed to link China's A-share slump to signs of some kind of distress, ignoring the fundamental side of the Chinese economy.

Unlike in most of the developed economies, the equity market only accounts for a small share of Chinese wealth. A sharp fall in the Chinese stock market has a limited impact on the overall economy.

Beijing has emphasized since last year that the real economy has entered a "new normal", a period of lower growth and deeper reforms. Meanwhile, it is still growing fast at an enviable rate. Problems do exist, but worrying about a probable crisis is certainly overdone.

In case of systemic risks, the Chinese government has enough policy tools to put the economy right. It has a large current account surplus and nearly 4 trillion U.S. dollars of foreign-exchange reserves. Capital account restrictions and the state ownership of major banks add to the stability of its financial system.

In the short run, foreign investors can be assured of China's tactical macroeconomic management. On Tuesday, global markets saw a big upturn after the Chinese central bank announced cuts to both interest rates and reserve requirements at banks.

Of course, market sentiments can be very volatile and volatility has its toll. Only those investors who have grasped an objective picture of the Chinese economy can weather the turmoil and reap their gains. Market jitters will not last long and lead to global contagion. The optimists just need more time to prove they are right. Endi