The Chinese dragon is losing some puff

 

China has been blamed, rightly, for disrupting its neighbours' borders, but the new storm of blame for disrupting the world economy is ludicrous.World markets recoiled and US politicians fumed when Beijing last Tuesday allowed China's currency to fall by 1.9 per cent.

The prominent American economist Stephen Roach said China could be launching a "new and increasingly destabilising skirmish" in the "global currency war".

Donald Trump, that master of understatement, accused Beijing of trying to "suck the blood" out of the US economy.

In Australia the rhetoric was more rational but the market moves bigger. The mining sector, for instance, lost 3.2 per cent of its share market value. China appeared to be trying to steal a competitive advantage on the rest of the world by cutting the price of its currency. So why shouldn't it be blamed?

On the day after Tuesday's devaluation, the Chinese yuan had lost a total of 3.7 per cent against the US dollar compared with its value 12 months earlier.

In the same span, the British pound was down by 8 per cent against the US dollar, the Indonesian rupiah by 18 per cent, the euro by 20 per cent, the Japanese yen 21 per cent and the Australian dollar 26 per cent.

The Canadian economist ​Ken Courtis asks why the world holds China to a double standard: "Is it ignorance, is it racism, is it a hope to see China fail, is it something else?

"Whatever it is, it is not analysis of fact."

So China was doing a little of what everyone else had already been doing much more of.

More than that, it was actually doing what the Western world had been demanding it do for decades. That is, allow its exchange rate more freedom to move.

The US, angry at China's trade advantage, was the leading voice in demanding that China allow the yuan to appreciate.

That's exactly what Beijing has done. Since 2005, the yuan is up by more than 30 per cent against the US dollar, according to the International Monetary Fund.

And the West has been demanding that China go further, moving from its controlled float of the currency to a freer float.  

As recently as last month, the IMF's Washington headquarters told Chinese officials that "more flexibility is becoming increasingly critical to move to an effectively floating exchange rate", according to board notes published by the IMF last week.

Now China has done that too. That's the bigger picture of last week's devaluation. It was not actually a government decree that the yuan weaken. It was a change to the system of daily rate setting that allowed the currency to fall in a day by more than the old system would have permitted.

So the West got what it had demanded, but didn't like the result. It turns out that the West only wants market forces to apply to China if it delivers the result that suits Washington.

This is rank hypocrisy. The Chinese are right to be indignant.

But there is a still bigger story at play here. The world had invested China was a special magic.  

Alone among world economies, China was supposed to be immune to the normal laws of gravity.

It's been growing so strongly for so long that an awestruck world had decided that it would continue to do so forever.

How else could we have taken so seriously China's official GDP growth figures? Endless screeds have been written earnestly about the least fluctuation in the published figures.

Yet no less a personage than the Premier of China, Li Keqiang, in an earlier incarnation described China's GDP figures as "man-made". Australia's most credulous tinkerbell moment came with the Gillard government's publication of the Asian Century white paper in 2012.

It was all about endless sunny uplands, risk free. Clap if you believe!

And there was something miraculous about China's growth. It wasn't unprecedented – Japan had similar or stronger growth in its postwar recovery.

But the sheer scale of China's accomplishment in lifting hundreds of millions of people from poverty made it a transformative event not just for one country but for humanity.

Yet no country can defy the laws of economics. China's miracle was, after all, an earthly one.

Bill Gates popularised an astonishing fact from a Vaclav Smil book – that in three years China used more cement than the US had used in the entire 20th century. If it's not sustainable, it won't be sustained.

And Australia should have known what was coming. We'd been through it before: "We saw the first round of nation building's impact on our resource developments from Japan from 1960 to 1972," says an elder statesman of Australia's mining sector, Hugh Morgan.

"After 1970 it had been fully serviced, its capacity fully installed, and then there was 30 years of continuous decline in real resources prices," he tells me.

"Then we saw round two when Chinese demand for international resources took off from 2002."

Of Australia's collective swoon, Morgan says: "We had great expectations; it was hard to go against those expectations. It was a community position.

"But once it's over, there's no excuse for not looking at reality."

Today Joe Hockey wants to believe in China. He says in recent days that he believes the assurances of China's top officials that ''we will do whatever we must''.

Yes, but it won't be whatever they must do to restore Chinese demand for Australian iron ore and coal at pre-2012 levels.

It'll be whatever they must do to escape the "middle income trap" that China has fallen into. That means more consumption and more services, less investment and heavy industry.

Australia's yet-to-be ratified free trade agreement with Beijing is the ideal opportunity to help Australian businesses take advantage of China's new phase.

But China's adjustment, correctly diagnosed in recent years by the US economist Patrick Chovanec, "is closer to the beginning than the end", he says.

There is a new era unfolding, but we need to get over the old one. It's not coming bacPeter Hartcher Sydney Morning Herald political and international editor Illustration: John Shakespeare.