China’s economic woes: the country’s leadership have much to lose
A quote from China’s architect of free market reforms, Deng Xiaoping, has resurfaced on the country’s social media after multiple trading halts failed to keep Chinese stocks from plunging in January, leading a rout in Asian equities and causing global markets to fall.
“Certain aspects of capitalism can be adopted by socialism. We should not be worried about making mistakes,” the late Chinese leader said in a 1992 speech about opening the country’s first stock market.
At the time, Deng had already set up special economic zones to experiment with capitalism, paving the way for the country to rapidly become the world’s second-largest economy.
“If we fail we can close [the stock market] and re-open it later,” he said.
Chinese internet users were sharing Deng’s comment to mock a short-lived “circuit breaker” mechanism that automatically shut down the country’s primary exchanges twice during the first week of the year.
On January 7, exchanges were only open for 15 minutes when plunging shares triggered temporary closure of the markets. On that day China also issued new rules to restrict share sales so that major shareholders could not sell more than 1 per cent of a listed company’s share capital every three months. Yet Chinese shares continued to tumble early this week.
Online jokes expressed envy at the lifestyles of the country’s stockbrokers and investment companies: “Everyone sing along with me now: ‘A stockbroker’s job sure is great, other jobs cannot compare. In bull market time we make a lot of money, and in a bear market we get to go home early!’”
Meanwhile analysts writing in the country’s leading economic publications questioned the judgment of government regulators – arguing that frequent government intervention has only worsened panic and prevented the market from being able to correct itself.
Some compared the regulators’ action to closing a casino early because gamblers were holding bad cards.
The “circuit breaker mechanism” was designed to automatically stop trading for 15 minutes if prices on the CSI 300 Index – comprising the 300 largest firms listed in mainland China – fell more than 5 per cent, and stop trading for the day if prices fell more than 7 per cent.
The CSI 300 index had already been volatile during the past year, more than doubling in the first-half of 2015 before losing about 40 per cent in the months that followed.
To its credit, the circuit breaker system was scrapped by China’s securities regulator late on January 7, just three days after it was introduced.
The most recent market sell-off followed disappointing results in China’s manufacturing sector, and worries that China may not have met its growth target for 2015 of about 7 per cent amid sluggish investment growth and falling exports.
The government had earlier revised down 2014 GDP growth from 7.4 to 7.3 per cent, the country’s weakest annual expansion in 24 years after decades of double-digit yearly growth.
Doubts have been raised about the credibility of government figures but China’s more recent data appears realistic.
In addition to stock market reverberations, China is facing other economic challenges. Its rapid growth during the past three decades had rested largely on exports of cheaply-made goods around the world. But as demand for Chinese exports decreases and labour costs rise, the country’s leadership has repeatedly said in recent years that the country must shift from reliance on manufacturing and debt-funded investment towards domestic consumption and the service industry. The International Monetary Fund (IMF) predicts that Chinese growth will slow to 6.5 per cent this year. The government says it will accept slower growth in order to prioritise reforms, but failure to succeed could mean losing control of the pace of the economic slowdown.
To add to concerns, a recent Barclays report has warned of a possible housing bubble burst in China. The real estate market underwent rapid growth from 2000 to 2008, and is an important driver of the economy; however, vacancies are sharply rising, with many apartments standing empty.
A collapse of the housing market could lead to a disastrous domino effect on areas such as banking and construction.
“The circuit breaker fiasco was not the main reason for the current panic,” says Ye Tan, an independent analyst in Shanghai.
“The fundamental reasons are the economy itself, poor performance of listed companies and the currency exchange rate drop.
“It wouldn’t help even if the government tries to do more to save the market, but some regulatory policies should be improved.”
Chinese stocks had slid more than 30 per cent from a peak in June over a three-week period last year, prompting a raft of government measures over the following months, including the suspension of new listings, establishment of rescue funds, freezing more than 40 per cent of the stock market, and allowing pension funds to invest more in stocks.
Then many seasoned investors pointed the finger at amateurs whom they said were borrowing money to invest and then panic-selling at the first signs of trouble.
“I have been investing in stock markets in mainland China and Hong Kong for 16 years,” says Wang Feng, an investor in Beijing. “Those who jumped on the bandwagon and chose to buy inflated stocks cannot blame anyone but themselves.”
A viral joke at the time said: “These are the world’s most extreme sports for your heart: Rock climbing, bungee jumping, skydiving, skiing, surfing and China’s stock market.”
Other internet users posted possibly doctored photographs of firefighters looking at the top of a building and holding up a banner saying: “Don’t jump! Wait until the stocks go back up.”
Stock declines last summer were attributed, at least in part, to investor unease over new trading restrictions that capped the size of the country’s margin-trading and short-selling for the first time.
Margin trading, where investors borrow money from brokers to buy stocks, had fuelled colossal rises in the stock market.
While regulators had introduced the restrictions to reduce unhealthy amounts of leveraging, when stocks started freefalling, the central bank pledged to provide more liquidity to the market – including funding margin lending by brokers. This exasperated experts who had raised concerns that margin debt had created a bubble.
Leading economists in China have since spoken out against further government intervention.
“I don’t want to see more government measures come out,” says Hu Xingdou, professor of economics at the Beijing Institute of Technology.
“I think we should respect the market rule and try to improve standards for the capital market in order to build up confidence for long-term investment, rather than a short-term speculation.”
Chinese premier Li Keqiang, who holds a doctorate in economics and is nominally in charge of the country’s economic planning, had said at the start of his tenure in 2013 that China would allow the market to play a bigger role in economic innovation, implying a reduction in state intervention.
Yet all Chinese leaders since Deng, including current president Xi Jinping, have hewed closely to Deng’s concept of “socialism with Chinese characteristics”, which upholds the model of a “socialist market economy”.
Under this framework, the government retains control of major market forces including state-owned enterprises which dominate industries such as steel, energy production and mining, and which enjoy massive state support.
The government is extremely concerned that an economic crash-landing in 2016 will lead to a political crisis, Beijing-based independent commentator Zhang Lifan says.
“Public trust in the government is already quite low. Many ordinary people have invested in the stock market. If they see bad results they could become angry at the government and the government could lose its credibility.”
Meanwhile, China is revving up its push to receive World Trade Organization market economy status this year.
Industry leaders from countries and regions including the United States, Europe and Latin America have expressed concern that if China is given market economy status, industries in China currently experiencing overcapacity would be at greater liberty to dump cheap products such as steel products into world markets.
Many doubt that the country has earned this recognition, given recent events.
“China is in fact not a market economy. When we look at the Chinese economy, we still see shadows of a planned economy,” says Yan Chengdong, professor of economics at Donghua University, Shanghai.
Sinologists have described an unspoken “social contract” between the government and the people of China, where the Party retains its legitimacy through driving economic growth and allowing opportunities for individuals to become wealthy. In return, citizens adopt an attitude of pragmatism and accept fewer political and social rights.
The estimated 680 million Chinese citizens who emerged from poverty between 1981 and 2000 might have signed up. But it’s debatable whether those watching helpless as stock values fall again would necessarily agree.
Joanna Chiu is a China correspondent in Beijing for Deutsche Presse-Agentur (dpa) news agency, and writes for international publications including The Economist and GlobalPost.
Updated: January 14, 2016 04:00 AM