The party panicsStock punters are generally advised not to underestimate authorities. That is particularly the case when the authorities happen to be the mighty Communist Party of China. The Chinese government is doing everything in its power to stop a stock market crash that has extended into its third week. Over the last three weeks, the Shanghai Composite index has tumbled more than 30 percent from its peak on June 21. The technology-heavy Shenzhen bourse suffered combined losses of over $3 trillion in a matter of weeks. The Chinese government’s intervention has been as spectacular as the performance of the stock market, its amazing rise and rapid fall. The central bank cut interest rates for the fourth time this year and pumped limitless liquidity into securities houses, while authorities bent all kinds of rules to prop up the market. They prohibited stock sales by institutional players and controlling stake-holders, suspended new share offerings and even allowed retail investors to use their residences as collateral to invest in the stock market. It commanded pension and social security funds to invest in stocks.
The government has resorted to extreme measures regardless of obvious side effects because it cannot run the risk of infuriating the masses. Back in 2007, Chinese shares plunged 72 percent. But at the time, state enterprises and local governments accounted for 80 percent of China’s stock traders. The 80 percent share is now held by retail investors, which includes farmers, housewives, cab drivers and college students - essentially the common folks. If they go berserk after losing all their savings, all the resentment and blame will go to the party that encouraged the frenzied stock buying. The world’s most powerful Communist Party could be threatened.
What the Communist Party in China fears most is angry masses. When the global financial meltdown started to spread in 2008, the Communist party pumped 4 trillion yuan into the economy to artificially bump up investment, spending and demand. That profligacy has ended in excessive investment and debt that have significantly slowed the economy down.
What the Chinese authorities are doing is pulling out all stops to mobilize public funds to keep up the buying. A propaganda campaign has also been activated. Chinese law enforcement has embarked on a massive crackdown, labeling short selling, spreading of rumors and price manipulation as serious crimes. Anyone who cashes out could suddenly be branded a criminal. Scapegoats will also be needed. Rumors are rampant that Xio Gang, the chairman of the China Securities Regulatory Commission, could be sacked.
Thanks to the all-out measures, the Shanghai composite index has rebounded over the last four days, recovering to 3,970, although that’s still a long way from the June high of 5,178. Experts are feeling skeptical of this bull run having any kind of legs.
The scenes in China could bring back some bitter memories for the older generation in Korea. During the local stock market crash in late 1989, when the leading index sank to 840 from 1,007, people who lost their savings committed suicide. President Roh Tae-woo panicked and had the central bank prompt buying by institutional investors. The Korean Composite Stock Price index, however, rebounded only slightly. By 1992, the Kospi went as low as 480. When the hemorrhaging was done, millions of investors were broke and three investment institutions went bust.
Will the Chinese authorities fare any better? From our experience, the answer is no. Prime Minister Li Keqiang assured everyone that economic fundamentals were solid. But China’s economy is expected to not reach its growth target of 7 percent this year. Shares on the Shanghai bourse are still dangerously inflated, their value doubled from last year. The price-to-earnings ratio of Chinese listed companies, which was around 10 last year, is now 25, a sign that they are in the bubble zone. The balance of outstanding margin loans lent by brokerage houses to retail customers to buy stocks has reached $300 billion. About 10 percent of the Chinese market is based on debt.
The onus in this roller-coaster ride falls entirely on the Communist Party. It bred greed in the masses and then pulled the plug by restricting margin loans. It used the stock market to help companies get richer through the equity market rather than by borrowing. But what it ended up doing was transferring corporate debt to individuals. If its stock exchange experiment blows up in its face, individual debt could translate into public debt. The Chinese bourses have become a contest between market capitalism and state-controlled communism. Their dizzying swings have worn down the market. The authorities must learn not to underestimate the power of the market.
JoongAng Ilbo, July 14, Page 30
*The author is an editorial writer of the JoongAng Ilbo.
by Lee Chul-ho