The Economist (11 July, 2015) points out that China wants to be King Canute turning the tide of the market in face of a looming meltdown. This, the esteemed journal says, exposes the emptiness of China's vow to let the market take center stage.
While there is much truth in The Economist's analysis, I am afraid it risks missing the whole truth.
China in recent months has been relentless in opening up her financial sector. She has also begun to rein in her over-bloated state-owned enterprises. They are now required to double their tribute to the state to the tune of 30% of profits. Various selected assets are beginning to open for private investment.
Despite slowing growth in 2014, new businesses registered an increase of 45.9% or 12.93 million units. 13.22 million urban jobs were created, more than the preceding year. There was a spate of e-commerce innovation, leading to the largest Wall Street IPO in history.
The stock market, too, has undergone momentous loosening, with initiatives like Shanghai-Hong Kong Connect permitting investors on both sides to invest in the other market, subject to quota limits.
Clearly the economy is changing towards slower but more market-oriented and innovative growth.
But China remains a huge work-in-progress. The recent market clash had been waiting to happen for some time. The massive demand of ordinary savers and investors to seek higher yields in a yet-to-fully-open financial system with interest-rate suppression mismatches the less-than-mature prudential system. Many companies have been taking advantage of this mismatch to deliberately restrict the volume of shares for market manipulation. There may also be some hedge funds or speculators hiking up prices in order to short the market. Shadow banking may also have played a part. This has led to ridiculous rapid swings in share prices.
Beijing knows this but was caught off-guard with the ferocity and rapidity of the roller-coaster. To prevent Armagedden, the leadership has seized the moment and vows to give what it takes to stabilize the market. The robust backing has led to a temporary rebound.
Both Beijing and the mass investors, many having their fingers burnt, have learnt a big lesson.
In future, Beijing is likely to redouble efforts to enhance her market prudential system, including perhaps mandating automatic suspended trading when volatility breaches certain preset limits, pending immediate investigation of any market irregularities.
But as my earlier analysis shows, it is too fast to jump to the conclusion that China's reform is stalling, or worse, as David Shambaugh claims, that the One Party regime is heading towards twilight, if not immediate collapse.
Meanwhile, however, Q2 GDP outturn is better than expected, although outlook for GDP growth in 2015 appears dimmer, according to forecast by BBVA, a Spanish banking group.
Leave a Reply