Euphoria has China’s stock market in its dangerous grip

There is a fin de siècle feel about China. Growth is fading fast but the stock market is galumphing to evermore exuberant, and seemingly irrational, heights. The property boom is over, as is easy government financing courtesy of land sales. Imports of commodities have slumped, as anyone in Brazil and Angola can tell you. Money is pouring out of China at an unprecedented rate and those who can are busily securing a foreign bolt-hole for themselves in case things turn sour.

In the political sphere, President Xi Jinping has established himself as the most powerful leader since Deng Xiaoping, or possibly even Mao Zedong. Editions of Mr Xi’s speeches regularly hit the bookstores as collective leadership gives way to the cult of personality. Yet there is something brittle about his authority. The more he attacks entrenched interests through an extraordinarily far-reaching anti-corruption campaign, the more vulnerable his own position could become. Even some seasoned China watchers such as David Shambaugh, professor at George Washington University, have thrown caution to the wind by predicting that the end of the Communist party is nigh.


One does not have to be anything like so bold to detect signs of real stress in the economy, which has been the main source of Communist party legitimacy for years. In the first three months of this year, it grew at 7 per cent, its slowest rate since 2008. Some economists say the slowdown is much sharper than official numbers suggest. It is true that China’s newly minted middle class now wants good jobs, clean air, safe food and less corruption more than it wants growth for growth’s sake. Yet if you are looking for flashing red lights, there are plenty around. Take the soaring stock market. At a pinch, you could see this as a sign of confidence, particularly in the vibrant technology sector. Yet, as investors shift frantically out of property and into equities, the ramp-up in valuations looks more frightening than reassuring. This year, the Shenzhen stock index, which is heavy on tech, has more than doubled in value. In May, trading volume on the Shanghai and Shenzhen stock exchanges combined was more than 10 times that on the New York Stock Exchange. Last week, a record 4.4m investors opened stock trading accounts as punters scrambled to get a slice of the fervid action.

In normal times, the government would seek to cool such exuberance. Instead, it is throwing fuel on the fire. The state-run press has carried prominent articles justifying the heady valuations. In May, the central bank cut interest rates for the third time in six months. Yet the real cost of capital continues to rise. Huge overcapacity in industries such as steel has destroyed pricing capacity. Real interest rates are thus at their highest since 2008.

One reason the authorities may be encouraging a bull run is that it helps to raise the valuation of hard-pressed state-owned enterprises. A record number of private companies are going bust as banks toughen their lending criteria. Yet in the public sector, the opposite is happening. The government recently ordered banks to prop up insolvent local government projects, saying they should keep on lending even if borrowers are unable to service existing debts. Since the massive stimulus launched in 2009, total debt in the economy has more than doubled to 250 per cent of output. That credit expansion has been accompanied by slower and slower growth, suggesting a potentially huge build-up (still largely unacknowledged) of non-performing loans.

As former Fed chairman Ben Bernanke says, this is not a story of cyclical downturn. Something much bigger is unfolding. China is seeking to re-engineer an economy that has relied for years on investment in heavy industry and infrastructure. Now it wants growth from domestic consumption and services. The authorities are caught in a trap. The more they leave things to market forces, the more the economy slows, obliging them to step in with “pretend and extend” administrative measures.

This doesn’t mean China’s economy is on the verge of collapse. The government has huge resources and a deep capacity to snuff out contagion in what is still largely a command economy. In spite of Mr Shambaugh’s prediction, you might well lay odds that, in 10 years’ time, the Communist party will still be in charge of the world’s biggest economy. Yet today’s stresses are the most serious challenge to growth-as-normal since the end of the 1990s when Zhu Rongji, former premier, was performing surgery without anaesthetic on the engorged state sector. Sooner or later, today’s stock market euphoria will give way to a more sombre mood.




David Pilling




Fonte: FT