(THE writer is a Senior Fellow at the Institute of Commonwealth Studies, University of London and Massey College, University of Toronto)
THE rapid and continuing slump of the stock market in China has so far been domestically concentrated, but there will be some effect that could reduce global economic growth. So no country should assume that this is a distant problem from which they are entirely insulated.
It is true that the Chinese financial system is largely sealed off from the international financial system as Derek Scissors, an analyst at the American Enterprise Institute, has pointed out. But, it is now the case that, given the size of the Chinese economy and the wide extent of its trading and investment relations worldwide, whatever happens in China’s financial system is bound to have a ripple effect globally.
China is no ordinary country. Over 33 years, from 1978 to 2011, it experienced an average GDP growth rate of nearly 10%. No other country has been able to match that achievement – not the US, Russia or Japan. The fact that the growth in China’s economy dropped to 7.4% in 2014 and will likely drop a little more in 2015 should not be mistaken for an economy in decline. Many other countries would welcome growth of 7%. Indeed, the current growth rate is what China’s leaders describe as the “new normal”.
However, unlike other countries, China’s financial system, including its stock exchange, is controlled by the Chinese government which intervenes to prop it up as necessary. Over the last few days, the central bank has made extra cash available to fund share purchases. Reports indicate that brokerage houses have been ordered to pump billions of dollars into the market, and government-backed funds have earmarked billions more to prop up the shares of flagging companies.
Of course, the Chinese government has the money. Between 2008 and 2014, its nominal GDP almost doubled, rising from the equivalent of US$4 trillion in 2008 to over US$9 trillion in 2014. While its total debt in 2014, including private households, independent firms and government institutions reached 282% of GDP – among the world’s highest levels for a major economy – the Chinese government has managed it adroitly through bailouts, particularly of four major national banks – the Agricultural Bank of China, the Bank of China, the China Construction Bank and the Industrial and Commercial Bank. In 2005 and 2008, the central government pumped a total of US$45 billion of foreign exchange reserves into these banks so that they could be publicly listed on the Hong Kong stock exchange.
There is every reason to believe that the Chinese government will do the same now in relation to its own stock exchange. China’s Ministry of Finance has already pledged to “adopt measures to safeguard the stability of capital markets,” and in particular protect state-owned financial enterprises.
The New York Times has reported that “China’s State-Owned Assets Supervision and Administration Commission, which oversees the country’s big state corporations, ordered many such companies with public listings not to reduce holdings of their own stock”. According to the usually reliable newspaper on China’s financial performance, “the China Securities Regulatory Commission even issued a notice encouraging major shareholders, directors and executives of companies to increase their holdings of their companies’ stock. The commission emphasized that rules about the timing of insider stock transactions that might deter such purchases would not apply”.
These are dramatic measures indeed; ones that could not happen in the US, Canada, Europe, Japan or in the Caribbean. Only in a state that still holds to the hierarchical system dictated by Confucius is this possible. The problem is that because the government’s intervention is artificial, improvement in the value of shares is equally simulated and not reflective of the productive capacity or profitability of the companies whose shares are traded on the stock exchange. State owned enterprises (SOEs) in China are as well known for inefficiencies and wasteful operations as are their counterparts in other parts of the world. Real investors will shy away from trading in their shares even if the government continues to buttress their values artificially.
At some point, the Chinese government will have to stop bailing out and propping up SOEs and state-owned banks. Authoritative reports indicate that from January to August 2014, nearly 1,500 Chinese non-financial firms offered bonds worth more than US$500 billion, but only 267 were private companies and raised only 6% of the total. The SOE’s sucked up 94% of the money and were allowed to offer bond purchasers higher interest rates than the private companies.
So despite central government aggressive intervention, China’s markets took a beating. In Shanghai, prices plunged 5.9%. In Shenzhen, they fell 2.5%. The damage also spread regionally to linked markets in Hong Kong and Japan, where shares also fell sharply.
But, no country should be pleased about this state of affairs or snigger behind their hands at China. While the slump in the stock market and the need for aggressive government intervention should be a warning to the Chinese government, there is right now no correlation between the crash and the health of the wider economy.
The world needs China’s economy to continue to be vibrant, to continue to be able to import goods and services and to invest abroad. When the 2008 global financial crisis started in the US with the collapse of Lehman Brothers, the Chinese government invested US$600 billion in stimulus funds to SOEs to fund infrastructural and industrial projects. The availability of those funds unleashed purchases of goods and services worldwide that helped global economic recovery.
China remains the world’s largest contributor to global growth. It has certainly helped to sustain many economies in the Caribbean, Latin America, Africa, the Pacific and Asia. It is the largest trading partner of 140 countries. That trading activity accounted for 13% of the world’s total growth from 2000 to 2012. Once China can sustain a growth rate of around 7% and maintain its present policy of expanding domestic consumption, it will remain an important contributor to global growth.
It is in the world’s interest for China to quickly overcome the current stock exchange difficulties, which is a hiccup in the scheme of things, and continue to grow its economy.
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