Sun, Jul 26, 2015 page8

• How vulnerable is China’s market?

  • By Sushil Seth
  • • 
    • 
    • 

  China’s stock market has been volatile lately, adversely affecting the fortunes of its small investors, who number in the millions. I will come to that later, but first let me focus on how Chinese President Xi Jinping (習近平) has fared since taking over as president and secretary general of the ruling Chinese Communist Party of China (CCP) in late 2012.

  Since then, Xi has been busy consolidating his power internally and projecting it externally. Internally, he moved fast to get rid of Bo Xilai (薄熙來), the former CCP secretary of Chongqing, who reportedly had his own political ambitions. Bo’s wife, Gu Kailai (谷開來), testified against her husband and that was enough to seal his fate. It took a little longer for another powerful political foe, Zhou Yongkang (周永康), a former security chief and member of the CCP Politburo Standing Committee, to be put on trial and convicted for life.

  In Zhou’s case, his wife and son testified against him. According to reports circulating at the time, both Bo and Zhou were considered fellow conspirators, though their trials and convictions were on corruption and related charges.

  Convicting on the basis of the testimony of close relatives is a bit over-the-top, but that is how Bo and Zhou ended up. They both accepted the justice so delivered. Xi’s power is now virtually unchallenged.

  Simultaneously, he is unapologetically entrenching the CCP’s monopoly power under his leadership. He has no time for Western notions of democratic elections, free speech and human rights. A leaked party document cautioned against such subversive notions and activities designed to undercut the CCP’s power. In other words, China’s model of one-party rule is a legitimate alternative.

  Indeed, it is considered necessary and effective for economic growth and social stability, enabling China to uphold and protect its “core interests.” These “interests” include its territorial sovereignty and integrity as projected into the South China and East China seas, where China has contested sovereign claims over a number of islands. It has simultaneously been creating artificial islands and a network of military facilities that is bringing the US and some other regional nations together to counterbalance China.

  For instance, Japan participated, for the first time, in joint military exercises in Australia, which included the US, Australia and New Zealand, and reportedly involved 30,000 troops.

  The Japanese government is also pushing to ditch its pacifist constitution, enabling it to be part of collective defense with the US. All this is happening against the backdrop of China’s projection of power in the region.

  At the same time, China is also committed to pursuing its economic growth. In the absence of any demonstrable index of popular approval, like periodic elections and freedom of the press, the validity and durability of China’s political system depends essentially on a healthy growth rate of its economy, providing employment and a modicum of economic prosperity for its people — which China has achieved, though there are pockets of economic deprivation.

  There is a fairly broad sense of dissatisfaction and resentment, though, with widening income disparities between rich and poor, and between rural and urban sectors. Such resentment is fortified and accentuated with widespread corruption at all levels of the party hierarchy and administration, which Xi is seeking to deal with, though it has a strong whiff, at times, of settling some old political scores.

  China’s economic growth since the 1980s has been remarkable, though it is starting to slow down. However, at 7 percent, it is still impressive. The CCP under Xi’s leadership not only intends to keep it this way, but improve on it by liberalizing and broadening the economy. In the midst of such self-assurance on the economy, recent stock market volatility must have come as a shock. In a few turbulent weeks, the market lost more than US$3 trillion, about one-third of its total valuation, despite all the measures the authorities took to stop the rout.

  In its efforts to broaden the Chinese economy, the government encouraged China’s middle classes to invest in the stock market, and they took to playing the market with great passion. With very low returns on bank deposits, the stock market seemed to be the ultimate casino, which promised an easy road to riches. That was mostly true, as China’s stock markets reached dizzying heights until recently.

  As the markets fell, China’s nearly 90 million middle class stock market players had to reckon with margin calls for failing stocks, which further increased the pressure to sell. With the authorities doing all they could to stop the fall, but with limited success, the all-powerful image of the CCP took a hit. Some small investors, who lost heavily, were critical of the government for not doing enough. They reckoned they were simply following what their government had encouraged them to do.

  Indeed, the authorities had even encouraged investors to play the market by using their property as collateral. Stock market volatility, therefore, affects the economy in all sorts of way.

  First and the foremost, it is the fading of the wealth effect. Once that takes on, it might affect consumer spending across the board. At a time when China is transitioning to a consumer-driven economy, rather than lopsided emphasis on investment in construction, infrastructure and its export sector, any loss of consumer confidence from a falling or static stock market is not helpful.

  Its damaging knock-on effect on the property market is another worry. The authorities have been doing everything possible to stabilize the situation. They suspended trading in almost half the stocks and injected liquidity. They have extended a hefty credit line to the nation’s major brokerages to buy up shares, and they have cut interest rates, which has helped, but does not rule out another bout of volatility.

  Even though the government has lost some shine to its virtually omnipotent image, some analysts believe that the stock market turbulence is likely to settle down, at least in the short term. Even though the stock market lost over US$3 trillion in a short period, it comes after a much steeper rise over the past 12 months. In other words, the diminishing wealth effect might be more psychological than real.

  However, psychological effects feel real to many people. It is this image of things going wrong that needs to be tackled.

  As one analyst said: “A failure to stabilize the market [indeed to achieve a notable recovery from current levels] could lead to a crisis of confidence in the heretofore infallible state apparatus.”

  Sushil Seth is a commentator in Australia.
• Most Popular

  • 1

    Taiwan places military on high alert

  • 2

    China warships near Taiwan nearly doubles

  • 3

    Flights arranged for Taiwanese stranded in Okinawa

  • 4

    Taiwan in Time: The Collector of historic buildings

  • 5

    Intel needs a core business strategy: Morris Chang