Crash Landing in China

New blog entry from David about the recent turbulence in the Chinese stock market. Full text after the break.

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Crash Landing in China

Or, China, Burning.

For a long time now there’s been concern over whether China’s long-sustained economic growth could continue, and many China experts have been asking openly whether, if things did go wrong, it would be a soft landing or a crash landing, and, if the latter, then how it would affect the rest of the global economy.

Well, now we –partially – know. China’s growth can’t be sustained, and we don’t need China experts to tell us that. It’s finally happened, in Hong Kong’s Hang Seng, as well as in other stock markets throughout the world.

It began back at the beginning of June, when, after a year of steady ‘growth’ in markets which had more than doubled their value, investors abruptly pulled out nearly $7billion from Chinese funds.  The authorities, in the form of twenty major stockbrokers and fund managers, pumped in 120 billion yuan (£12.3bn) to steady investors’ nerves, but fear of a stock market ‘bubble’ resulted in panicked investors  selling their stocks, resulting in a 30 per cent fall in value – a fall much akin to that of 1929 in its scale.

So just who are these panicking investors? Well, as in the 1720 South Sea Bubble, it’s usually the rich who get the massive profits and the poor – well, the relatively poor; your common speculative investor who sees the stock market as a sophisticated form of gambling – who lose their collective shirts. And that’s precisely the case here, only… China’s stock exchanges have over 90 million small investors – the largest figure of any major economy – and on average each one of those ninety million has lost 420,000 yuan, or over £44,000 – probably more by the time I’ve written this. It’s these non-institutional investors who, following sentiment and fear, have driven the Shanghai Composite over the cliff. As one Chinese expert said, “The market is panicking, and the government is trying to save it, so we are having something like a conflict between the two powers and we are not sure who will be the strongest.”

Li Keqiang, China’s premier, must be hoping things will settle, and fast, for the prospect of 90 million disgruntled – and fearful – investors rioting on the streets must be his worst nightmare. Indeed, this sudden taste of a crumbling economy has probably already irreparably damaged the people’s trust in the authorities, who, until the last few weeks, had seen nothing but an ever-increasing GDP and a perpetual climb toward the top of the economic tree.  In fact, there is no question of it. This stock market crash has already dented confidence in the country’s leaders. Only two months ago that was unchallenged, but now…? Now we enter dangerous territory.

Thing’s seem to have settled. Small gains have been made. But they are very small and China’s middle class has had a (bad) taste of what happens when two very different systems – capitalism and communism – fail to gel. Of course, some will argue that this has been coming for 30 years now, and, in the best overview of what’s been happening – Orville Schell’s erudite essay published in The Guardian last Thursday – the situation is stated succinctly –

“In the case of China’s stock market bubble, almost no one wanted to listen to voices of caution – and the whole country was to pay a bitter price for avoiding reality. For what was at stake was not just the integrity of China’s financial system, but the question of the Chinese people’s on-going confidence in their government. This would be critical as the country continued, in Deng Xiaoping’s words ‘to cross the river by feeling its way over the stones.’”

Schell goes on to say –

“So it is still far too early to speak of China’s stock markets as having ‘stabilized’ or ‘returned to normalcy’. By making the risky choice to prop up share prices as they fell, party leaders effectively took ownership of markets whose proper functioning requires them to remain independent. Evidently, they felt that their credibility as China’s grand air-traffic controllers was being put at risk – that they would lose credibility, respect and even face if they did not confront the plunging market head on and at least give the appearance of being in control.”

Oh, and I’m quite aware that what we’ve just seen happen in China has been rehearsed before in a work of fiction. It was bound to happen, and it remains to be seen just what happens next, and whether Premier Xi  Keqiang will continue to dream his Chinese dreams, or whether – in view of the enormity of what has happened in the last two months – take a stark reality check.

I’d be interested to hear what you guys thought about what’s been happening. My own feeling is that we’ve just witnessed a sea change in China. Just how things will change it’s difficult to say, but the good times are no more. The Chinese – over 200 million middle class Chinese, who represent the backbone of the new China – have been directly affected by this. They’ve lost money, and it’s now a question of broken trust.

And for the Party? Difficult times, I’d say. But I hope, for the sake of us all, they ride out this storm and learn from it.

David Wingrove      Sunday 19th July 2015