China’s Stock Market Is Not a Mythical Creature

A commentary by Bao Tong
2015-07-14
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An investor looks at screens showing stock market movements at a securities company in Beijing, July 14, 2015.
An investor looks at screens showing stock market movements at a securities company in Beijing, July 14, 2015.
AFP

China’s stock market is suffering from a roller coaster of booms and busts.

The stock market is a reflection of what is happening in other markets, and buying sprees and sudden falls are not a normal trajectory.

It is commonplace to see sharp falls in the stock market as indicative of a broader social or economic crisis. But is this applicable to China?

The stock market in China isn’t like stock markets everywhere else; it’s a bit of a freak phenomenon.

First, there is little correlation between the value of China-listed shares and the performance of the companies that list them.

Second, Chinese share indices are divorced from the wider economic situation, and even from the bigger picture generally.

This is a truth peculiar to China, and everyone from Joe Public right up to major figures in society, and government is aware of it.

The most recent proof of this truth is happening right now before our eyes.

During the past 12 months, China’s economy has clearly entered the long-postponed “new normal” phase. But China’s stock market seems to have been maliciously ramped higher and higher, rising by 147 percent until it reached a new high on June 12.

Actually, this turned out to be a curse rather than good news. Once past its peak, the stock market fell by 13 percent and 15 percent on two separate occasions.

But we should look at this cool-headedly, rather than treating it as the stroke of doom.

The effects of the plummeting market were serious, without a doubt.

First, it severely damaged and even wiped out the wealth of individual investors, who have nothing else to fall back on.

There are hundreds of millions of laid-off state employees who plowed their redundancy payments into shares during the 1990s because they had no other viable option.

Second, it was a big loss of face for our national leaders. It must have been hard for them to lose their omnipotence.

So now they are propping up the markets, and it’s too early to say whether or not this will work.
We can only try to imagine a few scenarios.

Market-boosting measures

If the market-boosting measures are a success, then the reputation of our leadership will no doubt bounce back too.

But what gives investors the shivers is not knowing whether, having lost all their original investment, they will ever make good those losses.

How will these investors who have once more been made redundant, this time from share-trading, make a living without the stock market?

Are our leaders willing to take responsibility and put further resources and manpower into propping them up, too?

If the market-boosting measures do work, it will prove that our leaders really are able to wield unthinkable power when it comes to the allocation of resources.

But in that case, what will become of the “leading role of the market in allocating resources” and the “deep [economic] reforms” advocated in the third plenum of the 18th Party Congress?

If someone were to tell me that “the leading role of the markets” is simply code for “the leading role of the party and government,” then it wouldn’t surprise me, but I still wouldn’t be able to get my head around it.

I would still worry that the market-boosting measures mean that the “deep reforms” touted at the third plenum have come to nothing.

I don’t invest in shares. I am old, and my eyes are dim, and I understand nothing of this stock market with Chinese characteristics.

In Mao Zedong’s day, they could take away your right to speak without bothering with an investigation. It’s just as well that the Constitution [of the People’s Republic of China] grants the right of free speech to all citizens.

And so, I would like to call on our leaders to take responsibility and a long-term perspective, and to allow this stock market that is really quite an ordinary thing, not some mythical creature, to thrive on Chinese soil and to be put to work to complete the task of economic reform.

Translated by Luisetta Mudie.

Bao Tong, former political aide to the late ousted premier Zhao Ziyang, is currently under house arrest at his home in Beijing.

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