China: Stock market crash can turn into a political crisis
Interview with chinaworker.info editor, Vincent Kolo
How serious is the stock market crash and how is the government reacting?
Vincent Kolo: The huge bubble that built up over the past year is imploding. The scale and speed of the crash has been dramatic. The Chinese regime is shell-shocked because it did not see this coming – crazy as that sounds – because everyone else saw it coming. The word ‘panic’ is the most common description used by the foreign media for the government measures and it’s an accurate description.
The stock market climbed to US$10 trillion in value (total market capitalisation) in early June, a gain of US$6.7 trillion in a year. In dollar terms this increase was unprecedented in such a short period for any stock market worldwide. The gain was equivalent to the total market capitalisation of the Tokyo stock market, the world’s third largest after New York and Shanghai-Shenzhen. In the first months of this year, billionaires – measured in dollars not yuan – new dollar billionaires were being created at a rate of four every week due to the soaring stock market. But the market has lost US$3 trillion in the past three weeks, falling by a third since 15 June. This sum is six times Greece’s entire foreign debt, or 11 years of Greece’s economic output. Securities Times, published in Shenzhen, reports that 760 companies, which is more than a quarter of all the companies listed in Shanghai and Shenzhen, have suspended trading in the past week. This is like a creeping ‘closedown’ of the stock markets which actually wouldn’t be a bad thing.
The small retail investors now number around 90 million, which is more than the Communist Party’s (CCP) membership for the first time. Millions of people – around 40 million – jumped into the market since the start of this year and most of them have lost money. They complain they can’t get out because many stocks are falling by the daily maximum limit of 10 percent, at which point trading is suspended. For those who have taken on huge debts to gamble through so-called margin trading it pretty much means ruin. We’re talking about a significant social layer, the urban middle class mainly, which the CCP regime needs as a social base for its continued rule. These layers have been hit by the downturn in property markets and one element of the regime’s thinking in fuelling the stock market boom was to open up an alternative means for this social class to increase its wealth, to keep consumer spending going, and to prevent unrest. This is the ‘China Dream’ of Xi Jinping and its been rocked to its foundations in the space of three weeks.
Do you see the government’s measures to rescue the stock market as succeeding?
This remains to be seen. The striking thing so far is how the government measures have failed; they’ve been trampled underfoot by the stampede to sell. We can expect more measures because there have been new policies announced on a daily basis. Since 27 June they’ve cut interest rates, injected more capital into the banks, blocked new share issues (IPOs), ordered brokerages, pension funds and SOEs to buy stocks, and launched a “market stabilisation fund”. Beijing has trained its artillery on the market, like when they bomb the clouds to make it rain. They’ve mobilised the state-owned financial system in a massive bailout operation culminating this week (on Sunday 5 July) with the announcement that the central bank will act as ‘buyer of last resort’ to stop the market slide. This is being described as ‘Chinese QE’ [QE = quantitative easing] by some financial commentators. But the banking system is already stressed in China following a massive debt run-up over the past five years, so it’s not a question of the banks saving the stock market, but rather of the government fighting to save both.
So, of course the regime is perplexed, panicked, when these policies, which in previous periods would have had more of an effect, have been brushed aside. But this reflects the wider economic malaise, with the slowest growth for a quarter century. Real GDP growth is 3-4 percent at most, one-third of China’s provinces are in recession and manufacturing industry is shedding jobs. People knew the stock market boom was an aberration, but believed that if Beijing was willing it to rise it would rise. It is this belief that has been shaken by the rout of the past few weeks. This can have a massive psychological effect in puncturing the myth that the government is all-powerful and that it can ‘command’ the economy to do whatever it wants.
This is not just an economic problem; it has also shaken the image of a ‘strong’ government. Today’s New York Times says the government’s failure to stop the market turmoil has dented the “aura of invincibility” around Xi Jinping. I read a Fitch analyst warning this could lead to a “crisis of confidence in the state apparatus.” The Economist magazine calls this the “first major dent in the public standing of the Xi-Li team.” This is what the bourgeoisie internationally fears – the potential for a political crisis in China – because despite their ‘democratic’ pretensions they have backed this state, a one-party dictatorship, to deliver the economic goods for capitalism.
The latest market support measures are unprecedented, as even Xinhua describes them, but they reek of desperation. Whether this is enough to arrest the downward plunge – it is much harder than arresting dissidents – that’s possible, but its equally likely the market will remain very volatile. This is despite the fact the government, as a dictatorship, can do many things that ‘democratic’ governments can’t do as effectively – firstly the mobilisation of the financial sector for this bailout and secondly, also very important, it can outlaw bad news. The media have been told they cannot use terms like “equity disaster” and “rescue the market”. They are not allowed to report suicides connected to the market chaos. The police have begun arresting people for ‘spreading rumours’. And at the same time, the People’s Daily is singing the market’s praises, telling us that, “Rainbows always appear after rains”! None of this guarantees success, however, especially when the real economic situation has run ahead of the government as is the case now.
If massive government intervention succeeds in restoring calm it will only mean the bubble will inflate again, but it will be an even bigger one, because speculators will take even bigger risks believing they have a government guarantee to support them. It’s what the liberal economists call ‘moral hazard’. A booming stock market is completely out of sync with the dire state of China’s economy right now, and the inevitable result will be an even bigger crash further down the line.
Why is the CCP regime so desperate to rescue the stock market?
Well right now this is a matter of the regime’s prestige – if they cannot save the stock market this will count as a very public and very humiliating defeat. It will have political implications. The first protests by angry traders are being reported, and that is something the CCP really doesn’t want. If the measures don’t work it means a loss of political authority which, for a dictatorship, can be fatal. It also threatens to aggravate what is already a serious economic crisis. The reasons why the CCP decided to engineer a ‘bull market’ go back to when the current leaders took over, in late 2012, because this is a key plank of Xi Jinping’s reform strategy, to give the market a ‘decisive role’ – that sounds very ironic today. With its economic model of Chinese state capitalism and debt-driven growth now exhausted and entering a deflationary crisis, the regime wants to use a buoyant stock market as a lifeline for the economy, to take the pressure off the banking system which is drowning in problem loans. This is especially to rescue debt-laden companies, by giving them a chance to issue more shares and use the funds to pay off their debts. China’s debt-to-GDP ratio is around 280 percent now, which is almost double what it is in Greece, and most of China’s debt is in the state-owned enterprises (SOEs) and local governments.
Now, this strategy seems to have blown back in their faces – the banks and SOEs are probably sitting on big losses from the meltdown in stocks. The aim of the current barrage of rescue measures may actually be short-term, to provide a breathing space for these companies to offload their bad ‘investments’ before the market tanks again. This is possible; the regime sees a different picture, a more accurate picture, and it may be much uglier than the one available to the public.
The Wall Street Journal compared Beijing’s emergency measures to [US Treasury Secretary] Hank Paulson’s ‘big bazooka’ to save Wall Street in 2008. This is also important to note, that China is not the only government that does this. Japan is doing it right now – manipulating the stock market. The important thing to note about China is that government manipulation, which is on a grander scale, has been going on continuously – they created the stock market boom – but they still lost control of it and now they’re paying the price economically, but also politically, especially if this level of turmoil continues.
The government itself triggered the market panic, which would have happened sooner or later anyway, when it imposed tighter rules on margin lending in June. The huge volume of margin debt in China’s stock markets, which has risen nine-fold in the past two years to around six trillion yuan (US$1 trillion) if both official and unofficial loans are counted, poses massive additional risks to what anyway is a game of financial speculation, because the lenders call in their loans if the gambler’s losses build up, forcing more shares to be disposed of, and this causes a stampede effect. According to Citigroup, only around a quarter of margin buys have been unwound so far, in the past three weeks, so three quarters are still tied up in the stock market waiting to exit. That suggests the turbulence can continue for quite a while.
A ‘normal’ stock market is a glorified casino, but the scale of margin debt which drove the surge in stock valuations makes China’s bourses more like a “game of Russian roulette” to quote the economist Anne Stevenson-Yang. Now, just three weeks after cracking down, the government has backtracked completely, taking fright at the market’s collapse. It has abandoned its tightening measures and has further eased rules for margin trading. It’s even allowing margin traders to use their homes as collateral to obtain loans, which is obviously not smart.
What effects can this have on the wider economy?
The desperation in the measures the CCP is forced to take tells us that things are actually worse than they appear (even worse than a 30 percent collapse in the stock market). There can be a chain reaction as companies, whose shares are often used as collateral for bank loans, find they are facing a credit squeeze. The banks’ exposure to all this stock market debt is one of the questions. Can there be financial contagion, especially through the shadow banking sector? China’s is the second largest [shadow banking sector] in the world after the US, but these unofficial lenders and trust companies are actually an adjunct of the state-owned banks. They’ve been heavily involved in the share rally and margin trading and creating a whole new range of wealth management products to feed the market euphoria. So, the desperate measures of recent days are quite probably because the Chinese regime can see a systemic threat, a threat to the financial system as a whole, and this is why they’re throwing everything at preventing a further market implosion.
Many international commentators are saying the Greek crisis is bad, but this is worse, China will have a much bigger impact on the global economy. Already global commodities markets are reeling – they stabilised but now copper, oil, metals are falling in price again – because of fears over China’s economy and reduced demand. China is by far the biggest importer of most commodities. There are many other ways that a crisis in China can impact the global economy. That’s why others, not only we socialists, have warned that the deepening crisis in China, of which the stock market crash is only a further expression, can unleash a new round of global capitalist turmoil, following on the heels of the 2008 Wall Street crisis and the current Eurozone crisis.
