CHINA is certainly not the first country to try to prop up a falling
stockmarket. The central banks of America, Europe and Japan have all shown form
in buying shares after crashes and cutting interest rates to cheer up bloodied
investors. But the circumstances and the manner of China’s intervention of the
past ten days make it an outlier, worryingly so.
The trigger
in China’s case is perplexing. Yes, the stockmarket is down a third over the
past month, but that has simply taken it back to March levels; it is still up
80% over the last year. Growth, though slowing, has stabilised recently. Other
asset markets are performing well. Property, long in the doldrums, is turning
up. Money-market rates are low and steady, suggesting calm in the banking
sector. The anticipated correction of over-valued stocks hardly seems cause for
much anguish.
Yet China’s
intervention has screamed of panic. Had the central bank stopped at cutting
interest rates—justifiable support for the economy when inflation is so
low—that would have been reasonable. Instead, there has been a spectacle of
ever-more drastic actions to save the market. Regulators capped short selling.
Pension funds pledged to buy more stocks. The government suspended initial
public offerings, limiting the supply of shares to drive up the prices of those
already listed. Brokers created a fund to buy shares, backed by central-bank
cash. All the while, state media played cheerleader. Far from saving the market
from drowning, the succession of life buoys only pushed it further under water.
The CSI 300, an index of China’s biggest-listed companies, fell almost 10% over
seven trading days after the rate cut. ChiNext, an index of high-growth
companies that is often described as China's Nasdaq, fell by 25%.
Theories
have flourished about why the government has waded in so heavily. The apparent
desperation is, some believe, a sign that officials see a looming economic
collapse, and are trying to staunch the wound before social upheaval ensues.
That story is intriguing, but it is not the most likely.
Lost in all
the drama about the stockmarket is that it still plays a surprisingly small
role in China. The free-float value of Chinese markets—the amount available for
trading—is just about a third of GDP, compared with more than 100% in developed
economies. Less than 15% of household financial assets are invested in the
stockmarket: which is why soaring shares did little to boost consumption and
crashing prices will do little to hurt it. Many stocks were bought on debt, and
the unwinding of these loans helps explain why the government has been unable
to stop the rout. But this financing is not a systemic risk; it is just about
1.5% of total assets in the banking system.
If economic
stability is not in peril, why then the panic? The most compelling explanation
is politics. The government has staked much credibility and prestige on the
stockmarket. When the going was still good, the official press was
chock-a-block with articles about how the rally reflected the economic reforms
that Xi Jinping, China’s top leader, was set to push. Li Keqiang, the premier,
said repeatedly that he wanted equity markets to provide a bigger share of
corporate financing—comments, from punters' perspective, not unlike
waving a red cape in front of a bull. The sudden end to the rally is the
first major dent in the public standing of the Xi-Li team. The botched attempts
to stabilise the market only make them look weaker, giving succour to their
critics.
But the
biggest concern about the panicked policy response is what it says about the
government's agenda. The economic hopes invested in Messrs Xi and Li stemmed
from their pledge in late 2013 to let market forces play a “decisive role” in
allocating resources. The actions of the past ten days have made abundantly
clear that it is still the other way around: the Chinese government wants a
decisive role in markets.
The failure
of share prices to do their bidding is, in that respect, welcome. It shows that
the Communist Party, powerful though it may be, cannot indefinitely bend
markets to its will. Chinese leaders should heed that lesson and get on with
the challenges of liberalising their economy. A relapse towards statism will
not just set China back. It also will
not work.
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