The death of China’s bull market is a
sobering wake-up call for the princelings of the Politbureau. Overconfidence on
the part of Chinese leaders has contributed to the financial chaos on the
Chinese sharemarket.
The origins
of this week's global financial chaos – and the economic storm clouds now
darkening over Australia – are best illuminated by a strange sequence of events
that may or may not have taken place three months ago. "It's good to trade
shares," China's President Xi Jinping reportedly told a journalist, during
an inspection tour in Hangzhou. The Shanghai Index "will soon hit 10,000
points!"
Xi was
reportedly bantering with a reporter who had jokingly confessed that she had
joined the national pre-occupation of "stir frying" shares. At first,
when the exchange was circulated by another journalist on her Wechat microblog,
with Xi using the same metaphor for flipping over-heated shares, China's army
of investors ignored it or dismissed it as fake.
Some
[Chinese leaders], it seems, believed they could suspend the laws of
economics.
China's bull
market (or "mad cow" market to use literal Chinese) had already
worked itself into a frenzy, with the Shanghai Composite Index sitting just shy
of 5000 points after doubling in just six months. Why would China's strongman
leader bet his reputation by predicting that this mad cow market would quickly
double again?
But two days
later when the market hit an air-pocket, on May 28, China's hyperactive censors
allowed the exchange to go viral across the Chinese cyber sphere and also to be
reported by mainstream online news
portals. Xi's utterances, apocryphal or otherwise, became known as
"The Ten Thousand Points Discussion" and they were given a whole new
layer of meaning.
The implicit
endorsement of propaganda officials was understood to be some kind of official
financial guarantee. And so investors gave the index one last great push until
it reached a peak of 5166 points, on June 12 – a stratospheric level that not
even the Chinese Communist Party could sustain.
When the
market inevitably collapsed the party battled to save the credibility of its
leader and itself by deploying its unrivalled array of command-economy
resources to prop it up again. For seven straight weeks it forced brokers to
buy, banned major shareholders from selling and threatened great police
enforcement actions against "manipulators" seen to be doing the wrong
thing. Analysts estimated the state spent several trillion yuan trying to defy
economic gravity, before raising the white flag this week. At the same time,
officials picked another fight with economic gravity, by mishandling a currency
adjustment and triggering new waves of capital flight.
These events
conspired this week to generate the greatest burst of financial volatility that
the world has seen in several years.
The last
time the world experienced financial and share market volatility like this was
during the depths of the Global Financial Crisis in 2008. Back then, China's
extraordinary fiscal and monetary stimulus stabilised the world economy and
rescued Australia from the brink of what might otherwise have been a deep
recession. This time, not only have we discovered that the Chinese economy is
in some trouble but, for the first time in nearly two decades, the credibility
of Chinese leaders has been damaged and it's not clear that they know how the
problems will be fixed.
In a
research note to multinational chief executives on Wednesday, the Conference
Board, a respected US non-profit economic research group, said: "The
regional and global equity contagion experienced over the past two days is
primarily about the world waking up to the China reality."
"Growth
is much lower than official statistics indicate and the authorities' ability to
manage growth is far more limited than previously thought," it said.
Beijing's
mega-stimulus in 2008 set off the greatest construction boom the world has ever
seen. By 2011, China's decade of hyper-industrialisation had boosted Australia'
national income by 13 per cent, according to a Reserve Bank analysis. We all
received far higher incomes, bought more things, and watched our house prices
soar without having to exert more effort.
But
delivering the world's largest ever fiscal and monetary stimulus also did China
a lot of damage. It fuelled a credit boom and a series of rolling asset booms
that rivalled anything that Japan or the United States have ever seen.
It undid
years of effort to reform state-controlled enterprises and discipline credit
and capital markets. Corruption grew out of control. All these costs were
clearly foreseen and articulated by Chinese technocrats at the time.
Perhaps the
greatest damage that flowed from the GFC mega-stimulus is what it did to
China's political establishment. The sudden surge in China's relative fortunes
encouraged many Chinese leaders to take their Marxist-Leninist-Stalinist-Maoist
ideology more seriously. Some of them, particularly many in the
"princeling" cohort, began to talk and act as if they had
proven the superiority of their system and perhaps also of themselves.
Some of them, it seems, believed they could suspend the laws of economics.
Most
investors knew that China's "miracle growth stage" finished some time
ago. Neither China's deepening economic travails nor individual company
fundamentals had ever really figured in the investment equation.
But it was
only after a March Politburo meeting that the realms of propaganda and economic
reality were seriously blurred and the party took to being the
cheer-leader-in-chief. After April 1, when the party's self-described
"mouthpiece", The People's Daily, printed a series of
editorials that virtually guaranteed that punters could not lose, the share
market rose another 25 per cent in just eight weeks.
When Xi's
Ten Thousand Points Theory was allowed to exist online, trading on this
apparent political guarantee made rational sense as China's leaders had policy
credibility. Now, after bizarre state-backed efforts to fuel a stock market
bubble and stop it from bursting, the policy credibility has been squandered
and the bill is falling due.
"The
sheer volume of the capital involved and the consequences that may follow over
a long period demand that we seriously reflect on what was done and what should
have been learned," said a commentary in Caixin Magazine.
It's the end
of an extraordinary era for Australia, too. The Chinese tailwind that inflated
our living standards for a decade is now blowing the other way.
John Garnaut is Fairfax Media's Asia-Pacific editor.
Illustration: Andrew
Dyson
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