Three trillion dollars. That’s the total amount wiped off the worthiness of shares in China during the last three weeks. That’s about ten times the GDP of Greece. The nationwide authorities is forcing a save of the plunging market, but will it hold? An avalanche in China would be far more consequential than Greece departing the euro. There are big variations between the strategies employed in Beijing and Athens as they wrestle with their problems. Greece is trying a “tyranny of the weak” strategy: if you won’t give us better terms, we will die on your doorstep.
It is improbable to work over time. Despite its referendum, Greece is broke, and can have to restructure. How it can so, and over what time frame, is really a European political issue that will go on long past the present deadline. China, on the other hands is seeking a “tyranny of the strong” strategy: we are powerful enough to be able to make things the way we want them.
However it has no more odds of success than the Greek strategy. Applying government resources to manage markets (sorry, that should be to “uphold market stability”) is hugely expensive, creates a complete great deal of other problems, and cannot be sustained for long periods. Within the last 12 months, China has used its authoritarian forces to induce financial markets to invert declining development through a combination of liquidity measures and policy changes aimed at increasing credit availability and currency markets investment. Lots of money has been poured into shoring up vulnerable local and municipal governments and condition owned businesses, and to increase margin credit for stock purchases.
Clearly, there has been an orchestrated work by the Xi Jinping federal government to manage marketplaces for political purposes, that have included creating a bull market to encourage confidence in further financial growth. However the bull market became a bubble, and the bubble began to burst into free-fall, needing further involvement to shore it up. Over the past three weeks these efforts have become extreme.
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12 trillion market capitalization of the many Chinese markets, but it surely is a whole great deal to the 21 brokers who have agreed to provide it. Will the government’s effort be able to stop the rout? Certainly, they may. China has vast resources that could be applied. So far, however, the federal government appears to be counting on its power to tell people how to proceed rather than on its deep storage compartments. Japan, which suffered an identical market crash in early 1990, also intervened thoroughly (to the extent of about 0.8% of market capitalization) to prevent the decline, which, like China’s, reached 38% following the first couple of months. It worked for a while, but not for long.
Two years later, the Japanese market index experienced lowered 65% from its pre-crash top. After the Chinese government decides they have stabilized the stock market sufficiently, and withdraws the amazing measures, chances are that the market shall find very little support. Eighty percent of Chinese stocks are owned by the country’s 400 million urban middle-class. What self-confidence China has gained from the world and its own prospering middle class in gradually adopting market economics will be lost, and what transparency there’s been will be sacrificed as cover-ups spread throughout the functional system. Most important, a lack of confidence in the Chinese financial miracle would greatly imperil the government’s paramount objective of reversing a declining GDP growth trend.
Because China isn’t a democracy, President Xi has more power than the other leaders. He can make bigger bets that he can override market makes. But, even in China there are factions and rivals that raise the stakes for President Xi to avoid an economic meltdown. The urgency of addressing the currency markets decline has pressed proper, long overdue financial reform into the background.