China: the ‘dead cat bounce’?

Whether the Chi­nese regime’s power is se­cure or not, it cer­tainly does not feel that way

The Guardian (Charlottetown) - - OPINION - Gwynne Dyer Gwynne Dyer is a Lon­don-based in­de­pen­dent jour­nal­ist whose ar­ti­cles are pub­lished in 45 coun­tries.

A few weeks ago, at the height of the panic in the Chi­nese stock mar­kets, a sour joke was do­ing the rounds: “Last month, the dog was eat­ing what I eat. Last week, I was eat­ing what the dog eats. This week, I think I’ll eat the dog.” A lot of peo­ple have lost a lot of money.

The Chi­nese gov­ern­ment is per­ma­nently ter­ri­fied. It is ter­ri­fied of cli­mate change, of slow­ing eco­nomic growth, even of a fall in the stock mar­ket – of any­thing that might cause the pop­u­la­tion to turn de­ci­sively against it. When you are run­ning a 66year-old dic­ta­tor­ship, and your only re­main­ing cred­i­bil­ity in the public’s eyes is your abil­ity to keep liv­ing stan­dards ris­ing, any kind of change is fright­en­ing.

How ter­ri­fied is it? Con­sider its re­ac­tion to the re­cent sharp fall in the two main Chi­nese stock mar­kets. China has a cap­i­tal­ist econ­omy, al­beit a highly dis­torted one, and stock mar­kets are a nor­mal part of such economies. They go up, they go down, and nor­mally gov­ern­ments do not in­ter­vene in the process.

The Chi­nese stock mar­kets have re­cently been on a roller­coaster ride. Af­ter tread­ing wa­ter for years, prices ex­ploded in June 2014. Over the next year, there was a 150 per cent av­er­age rise in prices on the Shang­hai Com­pos­ite ex­change and al­most 200 per cent on the Shen­zhen. Ob­vi­ously this was not sus­tain­able, es­pe­cially since growth in the real econ­omy has been fall­ing for years. A “cor­rec­tion” was in­evitable.

It came with a bang, on June 12 of this year. Since then, prices have fallen 30 per cent on the Shang­hai mar­ket, 40 per cent on the Shen­zhen. Around $4 tril­lion in pa­per val­ues have been wiped out – but so what? Chi­nese stock prices are still far higher than they were a year ago. In­deed, at an av­er­age of 20 times earn­ings they are still over­val­ued by re­al­world stan­dards.

Why would any gov­ern­ment in­ter­vene over this? Some in­vestors will win, some will lose and it will all work it­self out. But the Chi­nese gov­ern­ment in­ter­vened in a very big way. First, it cut in­ter­est rates to the low­est level ever. When that didn’t stop the slide in prices, it banned large in­vestors (hold­ing more than five per cent of a listed com­pany’s shares) and all for­eign in­vestors from selling their shares for six months.

It en­cour­aged around 1,300 Chi­nese com­pa­nies – half the stock mar­ket – to sus­pend trad­ing in their stocks. It for­bade any new list­ings (IPOs) on the mar­kets. It even or­dered a state­backed fi­nance com­pany to make new loans to peo­ple who want to make big­ger bets on the stock mar­ket than they can af­ford.

Any­thing and ev­ery­thing to stop the prices from fall­ing, and lo! They did stop. Last week, prices even rose a bit.

This may just be what traders call a “dead cat bounce” – if the price falls from high enough, there is bound to be a lit­tle bit of a bounce at the bot­tom – but that is mainly of in­ter­est to Chi­nese in­vestors. The in­ter­est­ing ques­tion for the rest of us is: why did the Chi­nese Com­mu­nist regime do all this?

Be­cause there are 90 mil­lion pri­vate in­vestors in the Chi­nese stock mar­kets. They tend to be older (two-thirds of them didn’t fin­ish high school), they have been bet­ting their sav­ings on the mar­ket – and ac­cord­ing to state media they have lost, on av­er­age, 420,000 yuan ($67,000) in the past six weeks.

That would be no prob­lem if you were al­ready in the mar­ket a year ago: you would still be well into the black. But a great many of the pri­vate in­vestors piled in very late in the game – 12 mil­lion new ac­counts were opened as re­cently as last May – and they have al­ready lost their shirts. They would have lost their skirts and trousers, too, if the gov­ern­ment did not stop the col­lapse in prices.

So the regime in­ter­vened. This may be be­cause the Chi­nese Com­mu­nist Party loves the cit­i­zens so much that it can­not bear to see them lose. It is more likely to be be­cause it is fright­ened that those tens of mil­lions of stock-mar­ket losers (who were of­fi­cially en­cour­aged to in­vest) will start protest­ing in the streets. Whether the Chi­nese regime’s power is se­cure or not, it cer­tainly does not FEEL se­cure.

This latest gov­ern­ment ac­tion is part of a pat­tern that ex­tends back to the global bank cri­sis of 2008, af­ter which China was the only ma­jor coun­try to avoid a re­ces­sion. It did so by flood­ing the econ­omy with cheap money. So few peo­ple lost their jobs, but the ar­ti­fi­cial in­vest­ment boom cre­ated a bub­ble in the hous­ing mar­ket that is now start­ing to de­flate: mil­lions of prop­er­ties lie empty, and mil­lions of mort­gages are “un­der wa­ter”.

Sooner or later, this game is go­ing to run out of road. The risk is that China’s road ends where Ja­pan’s 30 years of high-speed growth ended in the late 1980s, with a col­lapse to two per cent growth or less and a quar­ter­century of eco­nomic stag­na­tion. China is around the 30-year point now, and its regime is do­ing all the same things that the Ja­panese gov­ern­ment did just be­fore the col­lapse there.

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.