The Shanghai market posted a strong rally of 4.1 percent on Monday as expected, while the Hang Seng Index gained 2.3 percent. Whether if it will prove to be a short-lived rebound or a trend reversal will, to a large extent, depend on the answer to this question: will China deepen its “reform and opening-up” policy, and uphold the private economy?
Historian Tang Degang has described China as a huge vessel changing its course. Given this, it’s no big deal that the nation would stagnate for a couple of years as long as it’s heading to the right direction.
Recently, dealing with the slowdown in economic growth, it has been argued that Chinese authorities are changing the policy direction, with the state sector advancing at the cost of private enterprises.
An escalating US-China trade war is believed to have contributed to the latest economic slowdown and stock market sell-off in China. But Chinese Vice Premier Liu He and several other influential academics have pointed out that the trade frictions with Washington were bound to happen, and that the tariff battles will cause psychological impact rather than any real effect. China should be able to cope with it as long as it deepens internal reform.
China’s pessimistic market sentiment, as a matter of fact, is mainly due to fears about a change in policy direction. The recent debate about ending private property ownership in China has worried business owners and investors.
In response to that, the nation’s top four financial regulators lined up to restore market confidence last Friday and voiced support for private firms. Liu, the top economic adviser of Xi, admitted that the stock market slide was partly due to investors’ worries about the private economy and protection for property rights.
“There are some misunderstanding and differences in practice. For example, some might believe there will be political risks for lending to private firms, and they would rather do nothing instead of making political mistakes,” he added.
Liu stressed that private economy has contributed over 50 percent of the tax revenue, over 60 percent of GDP, over 70 percent of tech innovations, over 80 percent of urban and rural employment and over 90 percent of newly-added jobs and companies. In this case, supporting private enterprises means supporting the development of the overall national economy, he said.
Meanwhile, President Xi Jinping has written an open letter to the country’s private business owners, saying that the private sector’s historic contribution to the country’s development was “indelible” and “should not be doubted”. “Any words or acts to negate or weaken private economy are wrong,” Xi wrote in the letter published by the Xinhua News Agency.
It’s clear that the central government has realized that its discriminative measures against private firms in recent years is one of the main factors leading to faltering economic growth and fading market confidence.
Historian Tang has noted that China has taken around 200 to 300 years in its major transformations in the history. Therefore, it’s natural that the huge vessel would slow down its speed in the course.
In this case, if Beijing reaffirms that it would deepen reform and opening-up and respect the private economy, the latest market rebound could extend into a long-term rally and even set the stage for a new bull cycle.
This article appeared in the Hong Kong Economic Journal on Oct 19
Translation by Julie Zhu with additional reporting
[Chinese version 中文版]
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