In 2015, Beijing pulled out all the stops to halt the financial haemorrhaging. This time, amid debt and property crises and doubts over reforms, investors wonder why Beijing has been dragging its feet
Investors around the globe have many questions about China’s chaotic stock sell-off. Most relate to what is happening, how President Xi Jinping’s team might halt the plunge and where to hide?
But it’s the when that may matter most. The reference is to 2015, the last time cratering Shanghai shares made global headlines for an extended period.
The comparison matters because so many of the cracks Beijing pledged to fix eight-plus years ago remain below the surface. And they spook investors in ways that will keep shares under downward pressure in the months ahead.
These cracks include: extreme opacity, the continued dominance of state-owned enterprises, weak corporate governance, regulatory uncertainty, a feeble credit rating system and a Communist Party more focused on the symptoms of China’s troubles than the underlying ailments.
This list is as relevant today as in the summer of 2015, when plunging Shanghai shares panicked Wall Street. As mainland stocks lost 30 per cent of their value in three weeks, officials in Washington, Brussels and Tokyo wondered whether China was about to produce a shock on a par with that of Lehman Brothers seven years earlier. Perhaps even worse.
That didn’t happen. Xi’s men pulled out all the stops to halt the financial haemorrhaging. Trading was suspended in more than 1,400 listed companies. The People’s Bank of China flooded equity and credit markets with liquidity.
An investor watches an electric board at a stock market in Huaibei, in Anhui province, on September 7, 2015. Photo: Shutterstock
Capital controls were imposed, leverage requirements loosened, margin trading regulations altered, initial public offerings shelved, homes accepted as collateral and Beijing’s “National Team” of public entities and investment funds bought into the market early and often.
Beijing even raced out marketing campaigns to encourage people to buy shares out of patriotism. It was the kind of all-of-government rescue that arguably only China among major economies could’ve pulled off.
And until recently, it seemed a success to some historians examining crisis management case studies. Yet the bill is coming due, as evidenced by Shanghai shares approaching something like a free fall.
There’s no shortage of explanations for the rout. One is that Xi’s team vastly underestimated the collateral damage from the draconian zero-Covid lockdowns and has been slow to stimulate the economy. Another: the onset of deflation which, as Japan reminds us, is the last thing a highly indebted and ageing nation wants.
16:50
Can China learn lessons from Japan’s ‘lost 30 years’?
Can China learn lessons from Japan’s ‘lost 30 years’?
China’s property crisis is a major and intensifying headwind. The default dramas playing out across the sector have China in global headlines for all the wrong reasons. By acting slowly to fix the mess, China may be making the same errors Japan did in the 1990s.
When a sector that can generate as much as 25-30 per cent of gross domestic product sputters, there’s not a moment to lose. Beijing spent the two-plus years since China Evergrande Group defaulted dragging its feet. It is squandering a vital window of opportunity to get bad debts off developers’ balance sheets.
As the drip of bad news continues, investors will be wary, companies will be cautious and households may be too worried to spend more. China’s 5.2 per cent GDP growth last year masked the epic imbalances that it has no choice but to confront this year.
Confusion also reigns about whether Beijing learned any lessons from its crackdown on tech giants. Those manoeuvres in recent years prompted global investors to sell trillions of dollars of yuan assets. They had Wall Street debating whether China was “uninvestable”.
02:31
China GDP: Beijing’s long to-do list to boost its economy in 2024
China GDP: Beijing’s long to-do list to boost its economy in 2024
In recent months, Premier Li Qiang has been dispatched to do damage control. In November, Li pledged that China would accelerate its “high-level opening up” process. By late December, though, regulators had spooked markets with draft guidelines to limit consumption on online gaming. By moving again to clamp down on the virtual economy, Beijing telegraphed more wealth destruction to come.
A similar trust deficit may have opened up when it comes to capital market development. One reason households are so focused on owning property is the dearth of viable alternatives. Thanks to the casino-like qualities that govern mainland stock and bond markets, most consumers steer clear.
Increasingly, so are the globe’s biggest investment funds. Wendy Liu, chief China equity strategist at JPMorgan, speaks for many when she says foreign investors are anxious to “see a road map” for Beijing’s strategy to end the property crisis and address sky-high local government debt.
The bill for this latter problem is also coming due. After both the 2008 Lehman shock and 2015 stock plunge, Beijing left it to municipal leaders to help China make its annual growth targets. The jet fuel behind that growth was a boom in local government financing vehicles (LGFVs).
The good news is that China is working to defuse risks emanating from this US$9 trillion mountain of off-balance-sheet debt. The bad news: a dearth of transparency means investors still don’t know how much leverage there is across the world’s second-biggest economy.
In Davos, Li again tried his hand at spin, declaring that China has “huge potential” and is an “important engine” of global growth. Yet chieftains were left cold by the lack of concrete proposals or specific plans to remove regulations that complicate doing business in China.
The failure since 2015 to put big reform wins on the scoreboard is coming back to haunt China’s stock market. Xi has scope to flip the script in his third term as paramount leader. But he needs to get on with it, and fast.
Think of the plunge in Chinese stocks as a giant ticking clock. It’s expressing how investors wonder less about what Beijing will do and how, but when officials will prioritise economic reforms. Time isn’t on Beijing’s side in 2024.
William Pesek is a Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades”
