Why China Inc is still stuck in 2015
No industrializing nation has ever avoided a financial comeuppance. Neither will China
For all the hype about China’s great leap forward to 2025, the nation’s leaders find themselves with one foot stuck in 2015. This high-stakes game of geopolitical Twister is playing out in Shanghai stocks – again.
The first go-around was the summer of 2015, when worries about Chinese growth and extreme corporate opacity had shares in virtual free-fall. In just over three weeks, Shanghai stocks lost 30%, prompting more than 1,400 companies to request trading halts.
The exodus of liquidity had Beijing taking a “kitchen sink” approach – literally tossing everything it could think of at short-sellers. Officials slashed interest rates, loosened leverage requirements, bought shares, imposed capital controls, tweaked margin-trading regulations, suspended initial public offerings, allowed punters to put up homes as collateral.
President Xi Jinping’s team launched a marketing campaign to encourage households to buy the market out of patriotism.
Despite those Herculean efforts, Shanghai shares are now below 2015 levels. The ongoing $3 trillion rout has the Shanghai Composite Index at the lowest since November 2014. Why? The same concerns about growth and dodgy corporate governance.
Donald Trump’s trade war surely isn’t helping. But if Xi’s government had worked harder to modernize corporate practices, recalibrate growth engines away from exports and get the government’s hand out of the economy, US President Trump’s tariffs wouldn’t be an existential threat.
Beijing, in other words, made the Japan-like mistake of treating the symptoms of its problems, not the underlying causes. Xi is erring anew as Beijing ramps up stimulus efforts that will only exacerbate dueling bubbles in credit, debt and property.
His team also is cutting taxes as data on exports, fixed-income investment and purchasing managers’ orders turn ugly. So, sure, China might make this year’s 6.5% growth target, but at what cost in the long run?
The yuan’s drop by that same amount – 6.4% – this year is another metric worth considering. It sheds light on why Xi’s team is desperately working to keep capital in China.
It also presents a wildcard: might the yuan’s trajectory run afoul of the trade-warrior-in-chief in the White House? The risk is it provokes Trump to make good on threats to slap tariffs on yet another $250 billion of mainland goods, bringing the tally to $500 billion.
The last few weeks were dominated by reappraisals of the 2008 Lehman Brothers crisis. Developing Asia was forced to reassess how far it’s come – and hasn’t – since in 1997-1997 meltdown. Powerful plunges in currencies from Jakarta to Manila suggested that efforts to internationalize Southeast Asian economies weren’t as thorough as hoped.
Financial systems are stronger, governments more transparent and currencies more flexible. But efforts to wean economies off exports were half-hearted, at best. So were efforts, in some cases, to swing chronic current-account and budget deficits to surpluses.
China, meantime, is being haunted by a glacial pace of reform these last few years. In 2013, Xi pledged to let market forces play a “decisive role” in Communist Party decision-making. Yet he slow-walked moves to curb state-owned enterprises, loosen controls on free expression and give innovators greater latitude to disrupt China Inc.
It’s quite a paradox. Xi is investing trillions of dollars in a “Made in China 2025” scheme to dominate software, artificial intelligence, renewable energies, robotics, self-driving vehicles, high-speed rail, pharmaceuticals, you name it. But market chaos in Shanghai reminds us that the foundations beneath China’s ambitions are frail and, perhaps, due for a reckoning.
Yes, China is a unique development specimen. That will happen when the most populous nation becomes the No. 2 economy well before per-capital income decisively tops $10,000 in nominal terms. But no industrializing nation has ever avoided a financial comeuppance. Neither will China.
Whether this latest plunge in Shanghai suggests what eventually is afoot is anyone’s guess. And surely, Xi’s team is remarkably skilled as averting disaster. But, at the very least, the return of bedlam to Shanghai trading suggests China Inc’s troubles are growing almost as rapidly as GDP.