China’s shaky economy
The Shanghai stock market is dipping again.
Three weeks ago, it fell by nearly a third in total value wiping out some $3 trillion. The cavalry arrived with Communist Party leaders throwing everything they had to stop the hemorrhaging.
But like so many other parts of the Chinese economy, the names are the same but the function of the Shanghai market is not what stock markets are to economies in the West and Japan. Like the rest of the miraculous development of the last two decades, the stock market has been built from top down. So rather than represent the accumulation of capital from private investors for the growth of companies, it really represents an indirect function of government credit – with a large group of gamblers [90 million or more than the membership of the Communist Party] along for the ride.
When some smart operators decided they knew how to manipulate the market, they tripped what would otherwise have been the crash earlier. Beijing’s Communist rulers dived in to shore it up. They had no choice because the market had become a showpiece whatever its real nature, and with growth dropping rapidly in the overall economy, its dive for propaganda purposes couldn’t be tolerated.
The rescue operation was extensive and intensive: Beijing pulled one-third of the stocks off the market. The central bank went into the market to buy. A state pension put funds into equities for the first time. Beijing told investors holding more than 50% of a company they couldn’t sell for six months. Brokerage firms were underpinned by the government banks to hold stock inventories off the market.
For a while that looked like it would save the day, although no one was sure what would happen when any of these “props” were removed. No one seems to know exactly why less than a month later, again, the market plunged knocking the pins out from under the rally the government had been able to create. Perhaps it was information leaked from government sources that the withdrawal of the extraordinary supports was under way.
One further consideration all along was what is left for the government to do if the slump continues. There’s been general agreement the present setup cannot continue indefinitely
Again, the significance of this new collapse may be less its economic effects than its political implications. If it proves true, as now seems the case, that the government cannot even by pulling out all stops, “save” the stock market, what, one may well ask, is the government going to be able to do to stop the general slowdown? That’s’ now the case. Furthermore, the speed of the decrease in total economic activity as represented by the gross domestic product [GDP] has been seen by some observers as less significant the rapid rate at which it has fallen. .
Dropping from the record double digit figures of the last two decades, the GDP rate of growth officially dropped to 7% in the first quarter. Some observers, using the government’s statistics which are more than a little suspect, believe the GDP dropped even more. When the government came up with the surprising figure of a 7.6 growth in the second quarter, it was called “unexpected” by some and a downright lie by others.
. Although at least one major investment counseling firms in the West has warned its clients to “China-proof” their portfolios, the majority of observers are still clinging to the notion that the Communist government has all the tools necessary to prevent “a hard landing” for the economy. Again, that’s despite the evidence already presented in the case of the Shanghai market, even though it occupies a less important role than would be assigned it by superficial observers making comparisons to New York, London, Frankfurt and Tokyo.
But the slowing of the Chinese economy and its demand for raw materials has already had an effect on the worldwide commodities market, contributing in part to the fall in oil and gas prices as well. One suspects that some of the more optimistic talk about the China markets is wishful thinking as much as anything else. The cutback in growth has already taken its toll of some speculators – in copper, for example – and has had an effect on such major raw materials exporters as Australia.
Unfortunately, the world cannot be “China-proof”. And some of the more optimistic souls in the Obama Administration had better be thinking hard about what happens if the Chinese economy continues to sour.