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What Is Behind The Volatility In China's Financial Markets?


It has been an unnerving week in China, where the world's second-largest economy watched its markets plunge by double digits. Prices fell so sharply on the Shanghai Stock Exchange that trade was halted twice.

Meanwhile, the value of China's currency, the yuan, fell to its lowest level in nearly five years. All of that pushed markets down around the globe and here in the U.S.

We're fortunate to have NPR Shanghai correspondent Frank Langfitt here in the studio, having just arrived from China. Good morning.

FRANK LANGFITT, BYLINE: Good morning, Renee.

MONTAGNE: First off - has the market slide stopped for now?

LANGFITT: It has for now. It's much better. Actually, Shanghai was up 2 percent. The European markets and U.S. futures are slightly up as well, so things are calmer. What happened was the government stepped in. They tightened the band that the currency was trading on - that it fluctuates on. And they also stopped using these things called circuit breakers that were designed to shut off trading when there was a real steep drop. And what's actually happening is people were actually dumping their stocks before the circuit breaker kicked in because they were worried. And so it actually ended up having the opposite effect.

MONTAGNE: Sort of counterproductive?

LANGFITT: Very much so.

MONTAGNE: At least China's government thinks so. This is, though, the second market plunge in six months. It was down last summer. It's been up since then. Now it's back down again. So what really, in the big picture, is going?

LANGFITT: What happened is the government jumped in last summer when we had these problems, and they bought up a lot of stocks and stabilized it. But that doesn't change the fact that the industrial economy in China continues to slow.

I spent part of the fall actually visiting closed cement factories, struggling coal mines. And what we saw on Monday is data showing that manufacturing was continuing to shrink. That drove a plunge on Monday. We had another one on Thursday when the People's Bank of China allowed the currency to drop a lot more.

Now, in the short term, that can mean more money flown out of the economy away from the yuan. And, of course, that's less money to prop up stocks.

MONTAGNE: Well, China had suddenly devalued its currency last summer, which really rattled the markets at that time. What's going on with the currency this time?

LANGFITT: Well, they've allow the currency now to fall to about 6.5 yuan to the dollar. And that's making the yuan cheaper, so it's easier for China to sell things overseas. And that can maybe help the manufacturing economy a little bit. Of course, it makes it more expensive for China to buy foreign products, and so that's less demand for global growth.

So when you look at some big - some economies like, say, Australia, Mongolia - they rely a lot on China buying minerals and energy, and so it can be a big shock to other economies when China isn't buying.

MONTAGNE: What is the positive in all of this? - because there can be a positive when a country's currency goes down.

LANGFITT: Well, one positive for folks like us and people outside of this economy who are not using the yuan. But you can buy Chinese products cheaper. So that's actually good for Americans.

And I'll give you just a personal example. I live in Shanghai, as you were mentioning. It's really expensive there. Recently, I was changing money before I left. And I saw the exchange rate, and I was just thrilled because now I'm actually saving several hundred dollars in rent every month because the currency's fallen that much.

MONTAGNE: Well, that's nice - for you. But what does this tell us about the overall health of China's economy? And that, of course, has implications for the rest of the world.

LANGFITT: I think it's important to remember here that there's always a big reaction to China because it is such a big economy. It's such a big country. But we're not looking at a collapse. The economy's still growing, but I think we're in for a hard slog.

The industrial economy is slowing faster than, say, consumer spending can pick up that slack. Growth will probably continue, almost certainly continue to slow this year. The government has to make a big transition in this economy. They have to make it more efficient. They have to create more value. But they're also fighting vested interest. They're state monopolies and energies and telecoms that just don't want to see competition. So the world's going to continue to watch this very closely, and markets are going to continue to react to, really, almost whatever they see happening in China.

MONTAGNE: NPR's Shanghai correspondent Frank Langfitt, in our studio though this morning. Thank you.

LANGFITT: Happy to do it, Renee. Transcript provided by NPR, Copyright NPR.

Frank Langfitt is NPR's London correspondent. He covers the UK and Ireland, as well as stories elsewhere in Europe.