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. Last Updated: 07/27/2016

Chinese Patient Is Unwell

It's nearly August, so if you're superstitious, it's time to begin worrying about another global financial crisis.

Two years ago in August, the Asian flu was beginning to infect markets in Thailand and Korea; last August, a sudden Russian default sent financial markets into a panicky free fall that knocked the Dow Jones average down more than 1,000 points.

I'm not superstitious. Markets have a logic, even if it's sometimes hidden from the understanding of people whose last name isn't Greenspan. Still, some worrying signals from Asia these days suggest we should at least take our umbrellas along on vacation.

The X factor in global financial markets is China. In a few short months, it's gone from Asia's most important stabilizing force to potentially the most destabilizing. Part of the problem is Beijing's belligerent huffing and puffing over Taiwan. Chinese leaders may be right in blaming Taiwan's President Lee Teng-hui for upsetting a 50-year status quo by calling for two Chinas. And the Clinton administration is certainly right in trying to patch things together before hard-line politicians on both sides turn this into a military crisis.

But that, plus Beijing's recent crackdown on a seemingly harmless religious sect, has reminded the financial world that China is still run by an aging clique of communists who are entirely capable of screwing up a good thing. China's young bankers and computer scientists may represent the future, but they don't control the present. These political realities were probably a big reason behind Standard & Poor's decision last week to downgrade China's bond rating.

And signs are growing that Beijing soon may be forced to devalue its currency - something Chinese leaders resisted even during the darkest days of the Asian financial crisis. Indeed, China's stalwart refusal to join the wave of competitive devaluations helped keep the crisis from worsening.

But Beijing's financial troubles are mounting. Economic growth is likely to fall below the 8 percent target this year. Exports also fell sharply in the first half of the year, and unemployment in some cities is thought to be well above 5 percent - a politically dangerous level. Some economists warn that China may be following Japan into a deflationary spiral, with factories churning out far more products than consumers will buy.

To deal with these growing pressures, devaluation is increasingly attractive. China's central banker, Dai Xianglong, upset markets this month when he dropped the usual soothing refrain that China wouldn't devalue and said the exchange rate would be "determined by the market." And the World Bank's chief economist, Joseph Stiglitz, seemed almost to be inviting such a move when he said last weekend in Beijing that a devaluation could be good for China's economy, stimulating demand and thereby reducing deflation.

But a devaluation would upset other regional economies. Hong Kong in particular would be battered - forced to raise interest rates to defend its own currency. And other nations might rush into a new cycle of competitive devaluations, which could erode the confidence that has slowly been building in Asia over the past six months.

A nice cushion against any new China shock is the recent recovery of South Korea and Thailand, the two countries hit hardest in 1997. The South Korean stock market is up more than 50 percent this year, and the Thai market has gained more than 25 percent. South Korea has been surging so fast that economists keep raising their growth forecasts, with official estimates now for 6.8 percent growth this year, and some private forecasts predicting 8 percent.

But even this good news worries some analysts. They fear complacency and "reform fatigue" may be taking hold in Seoul and Bangkok - creating political obstacles to the changes still needed to make those economies fully part of the global marketplace. Though governments there have promised to continue with reforms, prosperity's sudden return is making it harder to get the patient to take the medicine.

As Americans have discovered over the past two years, we have much at stake in Asia's financial health. China's economic reformers are midway through one of the world's most important transitions, and they deserve strong U.S. support.

But even with the best intentions, Beijing and Washington must contend with the curse of August. With the Dow still at dizzying heights, it could be an interesting month.

David Ignatius is an associate editor of The Washington Post .