17 November 2019
Hong Kong's Hang Seng Index tumbled on Monday along with sharp losses in Shanghai and Shenzhen markets. Photo: Bloomberg
Hong Kong's Hang Seng Index tumbled on Monday along with sharp losses in Shanghai and Shenzhen markets. Photo: Bloomberg

How Beijing is humiliated when confidence is gone

Beijing’s failed rescue maneuver and sudden devaluation of the renminbi have been blamed for the global stock market contagion earlier this week.

Yet such rhetoric may have overstated the impact from China: global markets could only have been slightly affected by the sharp declines in A shares as long as the economies of the United States, Japan, Europe, Hong Kong and Taiwan are doing well themselves.

The global economy remains lukewarm amid gloomy prospects. In an op-ed in the Washington Post on Monday, former US Secretary of the Treasury Lawrence Summers argued against hiking interest rates at a time when the global economy is not far from another recession.

His appeal came amid speculation that the US Federal Reserve may start the tightening cycle in late October.

Yet according to Neo-Classical economic theories, it is ultra-low interest rates that underlie the current bleak climate as the policy gives rise to erroneous investments, which in turn results in a tremendous waste of economic resources.

The excesses of low interest rates are not obvious in China, where private businesses are still unable to get sufficient loans, but the country has woes of its own.

I hope independent mainland scholars can look into how much the Chinese economy has been “inflated”, as the growth and output targets directed by top leaders in Zhongnanhai must be fulfilled.

Given such an imperative, cadres follow the well-trodden path of government-led over-investment in order to ramp up output, but whether the projects are genuinely warranted may not be their concern. So their experience is not for those who value cost-effectiveness.

China’s closer integration into the global economy means it can no longer shield itself from external upheavals.

Meanwhile, an aging population, rising wages and the rising number of industrial actions – hurdles that are almost ingrained in a rapidly expanding economy – have also become a huge drag on China’s continued advancement.

The common sense is that a free market can never be immune from vicissitudes, but Communist bureaucrats think otherwise as they have no tolerance for an economic downturn.

Thus, once the command comes down from the top, subordinates in the entire government machinery will surely do their best, either by indulging in investment sprees or falsifying statistics, to please their bosses.

As a result, economic resources inevitably go down the drain.

Now a graver concern is that the cost of Beijing’s efforts to weather or mitigate the “hiatus” in the otherwise amazing China growth story may turn out to be unaffordable.

We have seen the dire consequences of excessive investment in the realty and manufacturing sectors, which have been encumbered by oversupply, and, the size of government debts, although still a well-kept secret, can be astronomically high.

The many self-inflicted woes are but a blatant evidence of an economy being overridden by politics: Beijing likes to grab a leading role in economic affairs while giving less play to the market. Growth targets can be achieved, but only in the short run.

When top leaders cook up a policy-driven market bull run in the hope that the quick gains will spur China’s somewhat tepid private consumption, individual stock investors will opt to retreat and shed their holdings. They know only too well that when economic fundamentals do not look solid, stock rallies are simply castles in the air.

Unlike government officials who can waste other people’s money to indulge their every whim, individual investors have to be prudent in the face of great uncertainties, so seeking a way out is the right move.

Yet this may constitute a serious offence after Beijing invented a new crime called “malicious shortselling”, although its exact definition has not been made.

Despite Beijing’s display of its ironclad determination to shore up the market, the Shanghai Composite Index booked the sharpest one-day drop in eight years with over 2,200 counters dropping by their 10 percent daily cap. Commentators have called the market turmoil a “black Monday”, which is a slap in the face and a crippling blow to Beijing’s authority.

Beijing has been busy churning up more morale-boosting policies like further reform of its state-owned enterprises and a landmark nod for pension funds to invest in stocks.

But sadly all its efforts have been of no avail with Monday’s rout, a worrying sign that people, obviously spooked, have no confidence in their government.

After its well-thought-out plans boomeranged, Beijing must now reflect on what went wrong.

China’s pension funds were previously barred from the stock market because the money was only allowed to sleep in bank accounts or purchase government bonds.

The liberalization, starting from next year, is expected to inject up to one trillion yuan (US$155.89 billion) of funds into the stock markets, based on an investment ratio cap of 30 percent of total net assets held by China’s pension funds, which stood at 3.56 trillion yuan at the end of 2014, according to the Ministry of Human Resources and Social Security.

This article appeared in the Hong Kong Economic Journal on Aug. 25.

Translation by Frank Chen

[Chinese version 中文版]

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A stockbroker works in front of screens displaying share prices at a securities brokerage in Hong Kong on Monday. Photo: Bloomberg

A famous Hong Kong writer; founder of the Hong Kong Economic Journal