As Chinese markets continue to tumble on Wednesday despite a freeze on shares worth $2.6 trillion, cartoonist Badiucao comments on the failure of government efforts to reverse the fall. In his drawing, Doctor Xi Jinping administers fluids to the patient, the stock market:
The patient's health is not quite as bad as the image suggests. While the government's attempts at treatment have been widely criticized as ineffective and even dangerous, many have argued that they are also unwarranted. The Economist, for example, suggested that the leadership has damaged its credibility and undermined its own reform efforts for little good reason:
The trigger in China’s case is perplexing. Yes, the stockmarket is down a third over the past month, but that has simply taken it back to March levels; it is still up 80% over the last year. Growth, though slowing, has stabilised recently. Other asset markets are performing well. Property, long in the doldrums, is turning up. Money-market rates are low and steady, suggesting calm in the banking sector. The anticipated correction of over-valued stocks hardly seems cause for much anguish.
Yet China’s intervention has screamed of panic. Had the central bank stopped at cutting interest rates—justifiable support for the economy when inflation is so low—that would have been reasonable. Instead, there has been a spectacle of ever-more drastic actions to save the market. […]
[…] The government has staked much credibility and prestige on the stockmarket. When the going was still good, the official press was chock-a-block with articles about how the rally reflected the economic reforms that Xi Jinping, China’s top leader, was set to push. Li Keqiang, the premier, said repeatedly that he wanted equity markets to provide a bigger share of corporate financing—comments, from punters’ perspective, not unlike waving a red cape in front of a bull. The sudden end to the rally is the first major dent in the public standing of the Xi-Li team. The botched attempts to stabilise the market only make them look weaker, giving succour to their critics.
But the biggest concern about the panicked policy response is what it says about the government’s agenda. The economic hopes invested in Messrs Xi and Li stemmed from their pledge in late 2013 to let market forces play a “decisive role” in allocating resources. The actions of the past ten days have made abundantly clear that it is still the other way around: the Chinese government wants a decisive role in markets. [Source]
The bruising of Beijing’s image has been a consistent theme of commentary. At The Wall Street Journal, Andrew S. Erickson and Gabe Collins wrote that the failure to reverse the slump has punctured “the myth of Chinese exceptionalism”:
[…] The bottom line is that China is not as exceptional as its leaders claim, or as some Chinese and foreigners imagine. It is not immune to laws of economics, the business cycle, or the gradual slowing of national economic growth and power accretion that typically besets maturing societies. And Beijing has not created a superior hybrid state-market model that can miraculously reap the benefits of more market- and legally-oriented economies while avoiding their drawbacks. Instead, it has created a massive bureaucracy that is strong and concentrated in some respects, but weak and conflicted in others. Moving forward, in assessing China’s prospects, analysts need to take a hard look—in part by considering the issues outlined below.
[…] China increasingly needs reforms that its political power structure appears ill-suited to implement effectively. China’s leadership has proved unwilling and unable to implement reforms sufficient to maintain current levels of economic growth amid gathering challenges. Markets were clearly over-optimistic about President Xi Jinping’s reform agenda: reforms have progressed more slowly, and less successfully, than expected. Xi and other Chinese leaders appear to know what economic reforms are needed, but how, when, and to what degree can they actually implement them without assuming unacceptable political risks? This remains the problem, and it remains unanswered. Initial enthusiasm for new policy initiatives, for instance state-owned enterprise reform, faded fast with opposition from “red families” and other powerful vested interests. [Source]
As in other spheres, reforms look set to be stifled by the overriding priority of stability maintenance, which The Wall Street Journal’s Andrew Browne describes as “another way of saying ‘maintaining party rule’”:
Far more than simply a market crisis, the Chinese leadership views turmoil on the Shanghai stock exchange as a potential security threat to the regime.
That helps explain the barrage of measures unleashed by financial authorities to counter a sudden market downturn that threatened to shake public confidence in the government.
In that sense, the unprecedented rescue moves, including a multibillion fund set up by Chinese brokerages at the government’s behest to buy blue chips, is a preview of what’s to come following the passage last week of a national-security law [background] that massively expands the definition of threats to the state to cover almost every aspect of domestic life, including “financial risk,” as well as international affairs. The law explicitly states that economic security is the foundation of national security.
This week’s attempt to bail out the market underscores the deep misgivings of foreign investors who fear the sweeping legislation gives the government a new mandate to override open-market principles in the name of combating real or imagined dangers to the Communist Party. [Source]
Some such dangers might come from within. A recent reversal over the transparency of former security chief Zhou Yongkang’s corruption trial has already prompted speculation that opposition inside the Party is gaining strength. As Keith Bradsher and Chris Buckley report at The New York Times, the failure of efforts to tame the stock market could further strengthen such rivals:
The faltering of these measures has put an embarrassing dent in the halo of unruffled supremacy built up around Mr. Xi’s administration, and this past weekend his government doubled down again, betting that it could beat bearish market sentiment into submission.
[…] The Chinese stock market’s plunge “is probably the most public and obvious instance where the government’s omnipotence has been challenged,” said Victor Shih, an associate professor at the University of California, San Diego, who studies the politics of financial policy-making in China. “I think the last couple of weeks really showed that, no, they do not have the ability to make anything happen.”
Unlike his predecessor, Hu Jintao, Mr. Xi has taken direct control of economic policy-making. He and the premier, Li Keqiang, the country’s second-ranking official, have been mute on the stock market’s difficulties. Mr. Xi has also been unafraid of making enemies with an unrelenting anti-corruption campaign.
“There are significant forces who have their knives out for him and are waiting for him to fail,” [Harry Harding, a specialist in Chinese politics at the Hong Kong University of Science and Technology] said. [Source]
Alongside the danger of emboldened rivals is the likelihood of public anger, after millions bought heavily into the government’s stock market hype. From Gwynn Guilford at Quartz:
The government’s creation of the Chinese bull market has disproportionately benefitted state-owned companies—and therefore the Communist Party—by replacing government-guaranteed debt with equity. That equity, of course, has been funded by the little guy—the second, and much bigger, part of the problem. When the state press and government officials began pumping stocks about a year ago, they essentially made a promise to protect the savings of tens of millions of households.
However, the stated strategy might leave them high and dry, says Andrew Collier, head of Orient Capital Research. Given the intensity of Beijing behind the operations, the liquidity the PBoC provides to the market via brokerages is likely to be many times larger than the announced 120 billion yuan.
“[The government] will have to focus on the indices and the big cap [companies] to affect the market, which will completely leave out the small caps that retail investors have been buying,” Collier tells Quartz. “If these stocks fall, there will be a lot of protesting unhappy investors. More problems for the leadership. They can support it short-term but not long-term.” [Source]
At Shanghai Scrap, Adam Minter considered the prospect of public unrest:
[…] Beijing, which has shown itself to be adept at deflecting popular blame for its mistakes in the past, is quickly finding out that its usual methods don’t work so well when millions of Chinese suddenly find their equity just isn’t what it used to be, and start looking for someone to blame.
[…] Government stock touts weren’t the only reason that Chinese investors piled into the markets (a cooling housing sector and low interest rates had many Chinese in search of returns). But when the strongest government China has seen in decades tells investors that equities are the way to go, and reacts to market drops by providing you more opportunity to leverage yourself (among other measures), it creates the illusion – if not the belief – that the government is keeping the markets safe. When those markets turn out to be otherwise, there’s only one Party to blame.
[…] So far, China’s 90 million stock investors – a number that exceeds the country’s 87.8 million Communist Party members – appear to have remained patient with their government’s efforts to save their savings. But the government’s unprecedented raft of rescue measures suggests in ways subtle and not so subtle, that the government doesn’t trust that patience will hold out indefinitely. […] [Source]
CDT is now selling t-shirts and iPad covers featuring Badiucao’s work in our Zazzle store. See also a Q&A with Badiucao in which he discusses his artistic and personal influences, and his earlier cartoons for CDT.