So – let’s start with the good news…
Phew! Meanwhile, China Daily warmly greets reports that 986 of around 2,800 Shanghai- or Shenzhen-listed companies have suspended trading in their shares to ‘provide a temporary safe haven’ from the ongoing Market Correction with Chinese Characteristics. Hongkongers remember that after Ronald Li closed the stock exchange after Black Monday in 1988, the market plummeted 33% when he reopened it, so the emphasis here is on the word ‘temporary’. It’s like putting off going to the dentist.
Commentators are presenting a range of explanations for China’s stock-market bubble-and-decline. At the really exciting end of the scale, millions of ordinary and often uneducated folk believed official propaganda hype late last year, piled into equities on borrowed money, leaving the government desperately trying to prop up the market in order to ward off regime-threatening riots and rebellion. At the relatively more restrained end of the spectrum, big state-owned companies and financial institutions were responsible for most of the leverage and – while they lasted – ballooning stock prices. This being China, no-one is totally sure.
In today’s South China Morning Post, Andy Xie sees the whole thing as a scam among big players to be seen in the context of China’s overall debt – and siphoning-off of debt – problem. To maintain the semblance of a strong economy, the government has commanded credit to flow into infrastructure, into property and now to equities. Much of it has been wasted; some has been stolen. The Communist Party is now finding that even centrally planned holes need to be filled in.
The chances are that China’s financial crisis has begun. The game of ramping up asset prices to cover up bad debts is coming to an end. Deflation will probably take hold. The government will find new ways to roll over debts in commodities and commodity industries. More and more zombies will populate China’s economy. The reforms may be triggered by capital account pressure … As interest rates go down at home but up abroad, a massive outflow is inevitable. That would put pressure on the exchange rate. As international pressure makes it very difficult to devalue, reforms have to unfold to keep money at home.
This is the optimistic scenario. The final reckoning of bad debts gives the government no choice but to implement real reforms. These are reforms that will hurt state-owned and government-linked entities controlled by leaders’ own families and friends, by making them compete with the private sector for financing and market share. Under this optimistic scenario, the government overcomes resistance and inflicts pain on loved ones and cronies for the greater good. No backlash takes place from vested interests or opportunistic enemies of Xi Jinping’s regime. China’s economy is reinvigorated and the next stage of ‘massive boom’ begins.
This presumes cool-headed, confident and determined leadership – not insecure, enemies-everywhere freaking-out. Which brings us back to panicky securities-markets officials who let a third of listed companies suspend trading in order to magically keep the index from falling, a la Wile E Coyote after stepping off a cliff, frozen in mid-air before gravity sets in. Because that sort of delusional regime, after painting itself into a corner, will blame evil foreigners for all that’s gone wrong, arrest people for spreading ‘rumours’, and get so frustrated when stock valuations don’t obey Party orders that they will divert everyone’s attention by invading some Philippine atoll or something, anything, to avoid facing the truth about kleptocracy, markets and life in general. After years of fantasy-creation and making it up as they go along, this could be the real test of the too-big-to-fail Communist Party’s grip on reality and events.