Peter Main
The volatility of the Chinese stock markets in the last week is symptomatic of the problems facing President Xi Jinping’s economic strategy. Between June 12 and July 8, the Shanghai market dropped by 28 percent, wiping some $3.5 trillion off the value of shares and forcing the government to take emergency measures to prevent a headlong collapse.
Major shareholders, that is the biggest corporations, were banned from selling any shares for six months, a 10 percent limit was placed on price rises in any single day and over half of all companies listed “voluntarily” suspended trading in their shares.
In the short term, the measures appeared to work; the Shanghai index rose by 5.76 percent in a single day, the biggest jump since 2009, but the long term implications of both the collapse, and the measures taken to counter it, remain.
Fictitious capital
Although the face value of the losses is greater than the total share value of the FTSE 100, it is not expected to have any great immediate impact on the Chinese economy as a whole. That is because the face value of the shares had no relationship at all to the “real economy”, having inflated by more than 150 percent in the previous year. What has been destroyed was “fictitious capital”.
The colossal increase in the Shanghai Index, at a time when the real economy was only growing, according to official figures, by little more than 7 percent, was a direct result of the government’s own policies. As we explained almost exactly two years ago, (see: http://www.fifthinternational.org/content/china-slowing-growth-rates-not…) Xi Jinping and Premier Li Keqiang, are pursuing a strategy of scaling back state-controlled finance and encouraging the “private sector”, that is, China’s developing capitalist class. As part of this, they want to facilitate companies, particularly the private businesses that often find it difficult to raise finance through the state banks, to attract funding via the stock market. As the role of the stock exchanges grew, so it was hoped, they would also become an alternative source of funding for state owned enterprises as financial regulators forced state owned banks to stop extending soft loans to them.
With this is mind, the government not only promoted share-buying by the general public through its extensive control of the media but also relaxed controls on credit. This encouraged people, and companies, to borrow money from stockbrokers to finance purchases of shares, so-called “margin dealing”. It is estimated that 20 million new share buying accounts were opened during the spring of this year. The scale of this borrowing was truly vast, according to a Wall Street Journal estimate, it reached $322 billion in the course of this year. That is what fuelled the spectacular rise of the Shanghai Index.
While small investors might have been duped into thinking this rise would go on for ever, the professionals new better and the market began to turn down in mid June as stockbrokers, mindful of just how much they had loaned, began to call in debts. It was these “margin calls” that precipitated the dramatic collapse in prices as investors began selling shares to take profits and repay loans. Of course, once prices responded to these sales, other investors began to take fright and to sell their shares and, thus, the avalanche began.
Credit Suisse has estimated that 80 percent of urban households in China have some money invested in the stock market, either directly or via equity funds, and it is many of these investors, who bought shares over the last few months, who will have lost most in the crash. Longer term holders are, for the moment, still ahead, since the market is still up some 70 percent on this time last year. Despite the personal tragedies that the collapse will undoubtedly mean, the economic consequences will not be great in the short term; a reduction in consumer spending, further cooling on the housing market, for example.
Long term
However, where these millions of relatively small individual losses are concentrated, amongst the brokerage firms, and companies who used shares as collateral for loans, the damage could be more long lasting. To counter this, the government immediately provided some $18 billion to the China Securities Finance Corporation to prop up brokerages threatened by the inability of clients to repay loans.
It is at the strategic level, both politically and economically, that the impact may be greatest. The present leadership of Xi and Li has embarked on a major restructuring of the economy to try to remove many of the remaining vestiges of the previously-planned economy. Increasing the role of the stock market as a mechanism for allocating capital in response to share price signals reflecting profitability was one part of this. Yet, as soon as this “free market” began to reflect the reality that shares were vastly over-priced and bore no relationship at all to likely profitability, the government intervened and effectively froze the market for at least six months.
Of course, that stopped the collapse; if major shareholders are not allowed to sell then prices are bound to stabilise, even rise a little in response to the stabilisation, the so-called “dead cat bounce”, but a major question mark has been placed over government strategy, and uncertainty is the enemy of investment.
Moreover, the aura of competence, even omnipotence, carefully nurtured by the leadership since it won the internal faction fight two years ago, has also been damaged. The defeated factions within the Party and the state apparatus will see the whole episode as justification of their opposition. In the broader population as well, the widely held belief that, whatever the wrongdoings of particular officials, the government and the party know how to run the economy, will be shaken.
Taken together with the continued slowing down of the economy as a whole, these latest events point to an increased likelihood of discontent and challenges to the authority of both government and Party. It is, therefore, hardly coincidental that a highly repressive new National Security Law has been introduced or that over the last weekend more than 100 human rights lawyers in 15 different cities have been detained by police on suspicion of involvement in a “criminal conspiracy”.
Their alleged crimes? Circulating information about the police shooting of an unarmed civilian in the province of Heilongjiang last May. And the evidence? They had “publicly challenged the court and organised petitioners to demonstrate outside the court”, clearly actions that justified charges of “inciting subversion” and “provoking trouble”!
In a similar vein, it was announced that the province of Guangdong, neighbouring Hong Kong, has been placed on a “top security alert” in response to a “terrorist threat” from Muslim Uighurs, from China’s far western Xinjiang province. As in other countries, any such threat is a response to the discrimination against Uighurs not only across China, where they are a significant part of the migrant labour force, particularly in construction, but also in their home province. Xinjiang not only has important mineral deposits but lies in the path of the planned trade links from China to Europe and Beijing is systematically relocating Han Chinese there.
Given the growing instability at a global level, with the USA openly developing the means to contain China’s expansion, and the early indicators of economic instability internally, the urgency of building a politically independent working class movement, armed with a programme and strategy to remove the one party dictatorship of the CCP whilst taking over the assets of the capitalist class becomes ever clearer.