Macroscope | How China’s falling stock market mirrors its failing economic policy

Chen Zhao says the repeated cycle of fiscal and monetary tightening followed by stimulus measures is largely driven by Beijing’s flawed deleveraging policy, and the drop in stock prices is just the latest phase

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An investor looks at an electronic board showing stock information at a brokerage house in Shanghai on October 15. Photo: AFP

Published: 12:00pm, 17 Oct 2018Updated: 1:46am, 18 Oct 2018

The Chinese stock market’s fall has finally unnerved policymakers. Securities Regulatory Commission chairman Liu Shiyu has assured investors that “spring is around the corner”, and governor Yi Gang promises that the People’s Bank of China’s toolbox is full and can deal with any risks facing the economy.

None of these statements has made a major difference, with share prices falling to fresh lows for this year. Since 2010, an economic stop-go pattern and policy flip-flops have characterised the Chinese economy: monetary and fiscal tightening often provokes undue economic weakness, forcing the government to reverse policy with a new round of policy stimulus.

How much of a fall should the world’s financial markets brace themselves for?

Examples include draconian monetary and fiscal tightening between 2012 and 2014, leading to a sharp economic fall in 2015. The excessive weakness forced Beijing to reverse policy in 2016 by slashing interest rates and ramping up infrastructure spending. The economy recovered in 2017.

Entering 2018, Beijing reversed policy again by tightening monetary and fiscal policy, and total social financing began contracting in March. The Chinese economy has begun weakening anew, with stock prices falling sharply since January. Therefore, China’s economic problems and falling stock prices are self-inflicted.

Yi Gang, governor of the People's Bank of China, speaks at the International Monetary Fund and World Bank Group Annual Meetings in Indonesia on October 14. Yi has attempted to ease investors’ concerns by saying the central bank is capable of addressing the risks it faces. Photo: Bloomberg

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.css-1m2rp1p{color:#34b8b5;}Macroscope | How China’s falling stock market mirrors its failing economic policy

Macroscope | How China’s falling stock market mirrors its failing economic policy