Economy

As China Staggers, The World Trembles

This week's currency setbacks for the world's second-largest economy have created a financial ripple effect across the globe, with stock market nosedives and raw material prices dropping to dangerously low levels.

Shenyang's Stock exchange in northeastern China
Shenyang's Stock exchange in northeastern China

-Editorial-

PARIS — If we needed evidence of China's crucial place in the global economy, its currency troubles emerging this week offer a resounding demonstration. By devaluing the RMB, or yuan, against the dollar three days in a row, China has sparked a shock wave — perhaps even the beginnings of a panic — in markets around the world. Stock exchanges from Frankfurt to Seoul have been left wobbling, and raw material prices, starting with oil, have plunged to levels unseen in more than a decade.

It comes amid a worrying context, despite Beijing's insistence that it is simply readjusting its currency value after a years-long increase. For a little over a year now, Chinese growth has been out of breath, and some sectors such as car manufacturing have been showing clear signs of slowdown. The real estate bubble is also bursting, leaving investors rushing to an immature stock exchange that collapsed at the beginning of July, forcing authorities to take drastic emergency measures to end the crash. The figures of Chinese exports published earlier this week, showing an 8% slump in July compared to a year earlier, planted the last seeds of doubt.

It seems obvious that the country's hypergrowth is now in the rearview mirror, and we can see that the government is trying to mitigate the damage every way it can. It is in the entire world's interest that it finds a quick solution. The Chinese engine is vital for global growth — and not just for French luxury brands and German car manufacturers. China alone buys, among other things, between one-third and half of most of the raw materials produced around the world.

The current devaluation, the most significant since 1993, seems intended to support the exports of millions of Chinese companies, and it bears all the signs of a declared currency war. But it should also be viewed as a desirable evolution towards the liberalization of the RMB, a prerequisite for its inclusion by the International Monetary Fund as a reserve currency alongside the dollar, the euro or the pound sterling. This has been Beijing's goal for a long time.

Behind the ongoing normalization, it's the Chinese economic model's viability that's being questioned. Everybody knows the diagnosis: Large state-owned companies represent a crushing weight that smothers private initiative. Restrictions on incoming capital and the tight grip on the banking sector guide investments towards government projects, leaving entrepreneurs marginalized.

From the moment he took office, President Xi Jinping has been pledging to resolve these issues. But growth has weakened more than expected, and the overused strategy of investing in massive infrastructure projects such as the high-speed rail is no longer enough to drive the economy — not to mention the matter of these projects actually increasing Chinese debt.

Inside the palaces of Zhongnanhai, headquarters of the Communist Party, government and party officials seem to be hesitating. They obviously fear instability. But more importantly, interest groups that have long enjoyed the status quo are lurking in the systemic obscurity created by the single party. Now that China's economy is second only to the United States, the whole planet is counting on it to reform itself.

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food / travel

Premium-Economy Pivot? Airlines Adjust Seat Size, Hope For Travel Rebound

Airlines are eyeing premium economy seating options to woo money-conscious business class travelers, and possibly weary economy passengers, back to air travel.

Changing travel patterns have led to airlines offering new products and reconfiguring cabins

René Armas Maes

-Analysis-

SANTIAGO — Back in May, I wrote that full-service airlines should start analyzing the costs, benefits, and impact of the demand of business travel, and see whether they would profit from reducing seats in executive class cabins, and from developing products like the premium economy class, which lies between business and economy in terms of comfort and price. They should start doing this in the last quarter of 2021 — I wrote back in May — especially considering that the demand for business class seats and its revenues were unlikely to recover in the following 12 months. And that is what is happening now.

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We are grateful for reader support to continue our unique mission of delivering in English the best international journalism, regardless of language or geography. Click here to contribute whatever you can. Merci!
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