Taking stock of the Chinese stock market slide

Taking stock of the Chinese stock market slide

Jul. 08, 2015

The past year was a hot one for investors in China’s stock market, as the index shot up 150 per cent over 12 months. But in a long overdue correction, Chinese stocks have lost, on average, 30 per cent of their value since the middle of June.

The government-controlled press offers assurances that China’s economic fundamentals are sound, but government efforts to support stock prices, relax margin rules and cut benchmark interest rates appear to be having little positive effect. Most Chinese don’t believe the government’s statements, and the more the government tries to instill investor confidence, the more people suspect that things are even worse than they’re being told.

With 90 million investors, China’s daily stock market turnover is bigger than that of the United States. About 80 per cent of investors tend to be small retail investors, people whose risky stock portfolio is both their medical insurance plan and retirement savings.

The Chinese market’s problems begin at a fundamental level. In general, the numbers reported by Chinese state firms and enterprises lack credibility, and few people have access to any knowledge that could make them better-informed investors. Financial investigators or reporters who expose embarrassing business truths or false performance claims or economic malfeasance usually end up in prison camps.

So Chinese people typically invest their savings based on rumour, tips on social media or on whatever their family and friends are doing. Their investing tends to be short-term and irrational; many watch the stock ticker daily and adjust their investments accordingly. In recent weeks, many middle-class investors have seen their savings wiped out, and many will have borrowed money to invest in a “sure thing” that has just gone to dust.

But the larger question relates to the implications for the Communist Party rule in general. When China’s stock markets were booming, the Communist media celebrated this as a sign of the superiority of the country’s authoritarian state capitalist model of “socialism with Chinese characteristics.” But when things are going very wrong, it is the party that is seen as accountable for the consequences.

The bottom line is that the Chinese middle class has been co-opted by the party to sacrifice their entitlements to citizenship, and to democratic freedoms and rights, in exchange for the promise of better living standards.

But if the Chinese economy continues to go south, it may dawn on 90 million largely urban, middle-class investors that the party is unable to keep up its side of the bargain.

If that were to happen, the prestige and legitimacy of Chinese President Xi Jinping’s leadership could erode rapidly. This would have grave implications for the country’s political and economic stability, as new voices emerge catering to the nationalist and populist yearnings of a people whose social values and aspirations are increasingly at odds with the country’s political and judicial institutions.

And if the people lose faith in economic systems they associate with corruption, secrecy and mistrust, many Chinese might decide to never invest in the markets again.

A hard economic landing with resultant political and social chaos would be disastrous for China. And it would have a major impact on other trading countries, such as Canada, whose prosperity is increasingly dependent on China’s stability and economic health.

Time and again, the Chinese Communist Party has shown surprising resilience in being able to preserve its political dominance and maintain national stability in the face of social and economic crises. It is probably in the best interests of billions of people that the government can somehow pull it off again.