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China's president is focus of concern as investors fear global slowdown

TAIPEI, Taiwan — In speeches and writings, Chinese President Xi Jinping often delivers the rhetoric of a Communist Party hard-liner. Yet more than ever, capitalists worldwide are depending upon this Leninist — one who is in the midst of a power struggle — to prop up the global economy.

Concerns about China contributed last week to Wall Street's biggest one-day sell-off since 2011, and the slide continued in early trading this morning on Asian markets.

The Shanghai composite index tumbled 6.2 percent this morning in early trading; Hong Kong's Hang Seng index fell 4.2 percent, and Japan's Nikkei 225 stock index dropped 2.5 percent.

Friday's rout was triggered by a report that China's manufacturing output had fallen to its lowest point since the 2009 global economic crisis. Investors increasingly fear that China's slowdown could be a tipping point for many emerging economies, many of whom became dependent on selling commodities to China during its go-go days.

The 531-point drop in the Dow Jones Industrial Average on Friday wasn't all about China. Investors also are worried about inflated equity prices, dropping oil prices, and the possibility the U.S. Federal Reserve could soon raise interest rates. But China's economic troubles loom.

"The market may have overreacted," said Charles Morrison, an Asia-Pacific expert who heads the East West Center in Honolulu. "But the Chinese manufacturing slowdown is a data point that creates concerns worldwide, because China's manufacturing sucks up so much of the world's resources."

By some measures, China's economy has grown to the size of the United States' and is still growing 7 percent a year. But that's a slowdown from previous years, and the impact is huge on China's trade partners.

Chinese manufacturing and steel production has fallen, crushing demand for Indonesian coal and Australian iron ore. Some of Brazil's economic troubles are linked to reduced Chinese demand for its commodities. In Taiwan, the government reported the slowest growth since 2012 for the first half of the year, largely because of reduced Chinese demand for Taiwan's manufactured goods.

In China, Xi is the final arbiter on all decisions. Since taking control of the party in late 2012, Xi has consolidated power more than any Chinese leader since Mao Tse-tung.

Like Mao, Xi has clamped down on dissent, and also railed against past communist leaders whom he sees as traitors to the cause — namely former Soviet leader Mikhail Gorbachev. At the same time, Xi has launched a broad anticorruption crusade, which has enhanced his domestic popularity but has not given him unfettered power to pursue some of his priorities.

One of these is an economic transformation. "China is looking for a new growth model," said Morrison, with a shift away from cheap manufactured exports to higher-end products and more domestic consumption.

But China's old model created formidable vested interests, including monopolistic state enterprises, retired party leaders and corrupt local officials with stakes in China's vast energy and steel-making industries.

On Thursday, Chinese state media carried a surprisingly blunt commentary reporting that Xi's reforms were encountering fierce resistance within the party.

"The in-depth reform touches the basic issue of reconfiguring the lifeblood of this enormous economy, and making it healthier," the commentary said. "The scale of the resistance is beyond what could have been imagined."

This month, the mouthpiece of the Communist Party, the People's Daily, published a series of stories on retired cadres lobbying against Xi's economic reforms and antigraft efforts. Some argue the disciplinary crackdown has led bureaucrats and China's wealthy to be reflexively cautious, slowing investment and government decision-making.

Among China experts, there's a spirited debate on whether Xi's policies are a significant drag on the economy. Morrison thinks that demographic factors — including a reduction in cheap labor from rural areas — have hurt China more. As the country's labor supply shrinks, wages are rising, and some industries are moving elsewhere to reduce production costs.

"Also, the government investment-led growth has resulted in excessive surpluses in some areas," reducing return on investment, Morrison said.

Others say Xi has mishandled an already tough situation and is creating adversaries that could further destabilize his rule.

"China's economic transition was always going to be difficult, but developments this year suggest that things are not going according to plan," George Magnus, an associate at Oxford University's China Centre, wrote in the Financial Times on Friday.

"The centralization of power is proving to be a double-edged sword for reform, the anti-corruption campaign is choking off initiative and growth and the economy cannot be kept on an unrealistic expansionary path by unending stimulus," he wrote.

As China's economic challenges mount, economists and investors are watching whether Xi's actions match his reform agenda. Lately, they have been disappointed. Despite lip service for embracing market forces, China's leaders intervened quickly in July when China's two major stock markets tanked.

While equity prices in China have little effect on the nation's overall economy, the government's intervention has further damaged the credibility of China's management of its markets.

Xi and his economic team have also come under criticism for China's unexpected devaluation of its currency this month. Chinese leaders characterized the move as a first step in letting China's currency, the yuan, float more freely based on market conditions. The yuan's subsequent drop in value suggests Beijing may be sincere in that pledge, but skeptics have reason to wonder. A weaker yuan makes China's exports less expensive than competing products compared to those of competitors, such as U.S. and European manufacturers. It has also prompted other countries, including Vietnam, to follow China in devaluing their currencies, which could further harm Western companies trying to do business in Asia.

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