KELLY MCEVERS, HOST:
To get a better understanding of what's going on inside China, we've called Jamie Metzl. He's an Asian expert with the Atlantic Council. And first, we heard about this lack of transparency in what's actually happening in China's economy. I mean, why don't we have a better idea of China's economic problems?
JAMIE METZL: Well, a lack of transparency is a problem across the board in China, not just in the economy but elsewhere. But in the economy, where the legitimacy of the Chinese government is in many ways pegged to economic growth, the government has is very careful about the kind of information that comes out. And that's why we've seen all kinds of situations where people giving just basic economic information that would be perfectly legal and normal elsewhere winds them up in jail in China. China is invested in these very high growth rates because of this connection to legitimacy.
MCEVERS: Right.
METZL: And when this bad news comes out, sometimes the government allows it to emerge, and sometimes it's suppressed. And when you multiply that across an economy, you get to a point where people don't really trust the numbers. And that's why when there are other indicators of economic growth or decline, people jump onto them because we don't know what to trust and what not to trust
MCEVERS: All right, so you're not going to go to jail for answering this question.
METZL: Yes.
MCEVERS: Explain to us why China's economy is slowing down.
METZL: First, the global economy is slowing, and so their export markets aren't as robust as they've previously been.
MCEVERS: Right.
METZL: But secondly, China is becoming less competitive as a global economy in part because they are trying to transition from a manufacturing and export economy into an economy that's focusing on innovation and higher-end products. And as they do that, as their cost of production goes up, they are competing with high-end economies like the United States, Japan, Germany, Korea. And that's a very, very difficult place to be. And so China knows what they need to do, but they're having a tough time enacting the structural reforms needed to get there.
MCEVERS: So it sounds like the slowdown itself isn't a surprise, but do you think that the reaction to it - some would say, as we heard, the overreaction to it - is that a surprise?
METZL: Well, everybody assumes that Chinese leaders are these incredible geniuses, but they're not. They're humans like leaders in any other countries, and they don't have a lot of experience in managing a complex capitalist economy. And so when push comes to shove, very often, although they recognize the need for market reforms, that's not what they do.
And six months ago in the middle of last year, when there was a major market crisis, rather than trusting in the market, which is what they said they were going to try to do, they created all of these controls, one of which was a limitation on how many shares of companies big investors could sell. And that was set to expire six months later, which is now. And there are all these pent-up misallocations of resources, valuations that don't make sense. And for China, like for everybody else, at the end of the day, gravity applies.
MCEVERS: And China has shut down trading twice already this week, but it says it won't do that tomorrow. I mean, have we seen the worst of this already?
METZL: I don't believe so. China established these so-called circuit breakers. And the goal is that when in a given day, if the stock market - the Shanghai stock market - falls by 7 percent, then it shuts down for the day. The problem is, China's stock market is very much like a casino. There's lots of wild swings up and down. And so investors, many of whom are retail investors, were gaming the system.
So when you get to 4 percent, rather than people calming down and taking a step back, people though, well, jeez, if we get to 5 percent, then I'm stuck; I better sell now. So even in this one week of these the circuit breakers, it was having the reverse effect of what they had intended.
But the core problem is that the valuations in the stock market today don't really correspond to the underlying fundamentals and to people's perceptions of where the Chinese economy is actually going. And so if you're going - if they're going to have a market economy, they need to have more faith in the market process. But that requires a very tough stomach.
MCEVERS: Jamie Metzl's a senior fellow with the Atlantic Council. Thank you very much.
METZL: My great pleasure. Transcript provided by NPR, Copyright NPR.
