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The fall of the Chinese economy: myth or reality?
On the state of macroeconomic indicators of the Chinese economy and its stock market, the expert François Godman (France)
The current fluctuations in the Chinese and global stock markets are riveting the attention of any geoeconomist. The Shanghai Stock Exchange is notorious for its volatility: two years ago, when there was an economic boom in China, it experienced a sharp drop in quotations, and over the past year, they have been uncontrollably flying up, despite the slowdown in the growth of the PRC's economy. In addition, the exchange is famous for its dominance of insider trading and has little or no connection with international markets (the bridge to the Hong Kong Stock Exchange has only recently appeared).
Francois GodmanExpert of the European Council on Foreign Relations
In other words, the Shanghai Stock Exchange lives in constant expectation of disaster. Moreover, its first fall on June 15 was most likely caused by a purely external factor: the conviction of Chinese investors and speculators that the impending Greek default would provoke a serious crisis in Europe, followed by a drop in demand for Chinese exports. In addition, Chinese investors feared a slowdown in US growth due to the expected increase in the Fed's interest rate. Commentators often do not take into account how much Chinese buyers of securities are influenced by their perceptions of the prospects for the world economy and the very pessimistic forecasts that the domestic media often feed them with.
Subsequent events have demonstrated both the power of the Chinese authorities and the growing inconsistency of their economic policies. The visible hand of the state took the market by the collar and set it on its feet - this happened when the prime minister Li Keqiang was on a visit abroad. In principle, this is not surprising: Chinese macroeconomic policy has been hesitating for many years, alternating the brake and gas pedals in an attempt to deflate speculative bubbles in time and then prevent the resulting slowdown in economic growth. In the past, however, the authorities did not have much control over the stock market, despite the many dubious transactions that took place there every day. At the same time, the government essentially guaranteed the stability of the yuan's exchange rate. In recent months, pegging the yuan to the dollar has begun to cost a lot for the country's foreign exchange reserves.
Everything changed in June and July. On the one hand, by actively and massively intervening in the situation on the stock market, the Chinese authorities stopped its fall, but achieved this at the cost of actually freezing the market. By doing so, they, unwittingly, convinced market players that there are serious problems in the economy. From that moment on, private investors basically left the market at the mercy of the state. But with regard to the national currency, the Central Bank issued a statement in early July that was essentially tantamount to a change in the regulatory regime: from certainty pegged to the dollar to uncertainty about a certain market rate. The fact that this measure was initiated and promulgated by the "reformist" Central Bank, which does not always enjoy the full support of the government, was of considerable importance: after all, trust is the alpha and omega of the markets. Most investors regarded this move as a hidden devaluation in order to increase the competitiveness of Chinese goods - and decided to play to strengthen this step.
Subsequent events can only be called a catastrophe of misunderstanding caused by the indistinct policy of the authorities, who have lost their general sense of direction. The central bank had to actually take back its words, buying up yuan every day before the close of trading in order to stabilize the exchange rate the next day. State funds became the main player on the stock market, while private investors withdrew themselves - or waited for the opportunity to sell their securities.
And all this happened at a time when there were already enough shocks in China. In part, they are of a political nature: an increasingly active campaign against corruption is sweeping away from their posts more and more high-ranking officials and their entourage in the army, security services, in various provinces - from Shanxi to Guizhou and Hebei. There are no more untouchables - except perhaps the closest circle of Chairman Xi; even relatives of past leaders who have taken high positions, such as the children of Jiang Zemin and Li Peng, are under attack. The recent catastrophe in Tianjin, which has become a symbol of pervasive corruption in the Chinese industrial complex, only adds to the uncertainty another aspect: if the city leaders are brought to justice, then in all of China no one in the local government will feel safe - after all, they all act approximately same.
If all this happened during the times of Deng Xiaoping, Zhao Ziyang and even Zhu Rongji, it would be possible to get out of the impasse by political methods: to come up with a new reform initiative and on this skate to get out of the crisis. But so far, Xi Jinping has positioned himself as a supporter of technocratic, depoliticized reforms and avoided any rhetoric related to a market economy, economic liberalization, and even more so free and independent institutions. His indisputable personal power was achieved at the cost of emphasizing the greatness of China at the expense of reform.
Obviously, in the highest echelons of power, they hesitate and argue. After an attempt to liberalize the foreign exchange market, the Central Bank returned to supporting the yuan, and then reassured everyone that there would still be a transition to a flexible exchange rate, but in practice this has not happened yet. Instead, the authorities, in fact, stopped interfering in the activities of the Shanghai Stock Exchange - that is, they did not prevent it from returning to free fall. But the move was shrouded in uncertainty: in late August, the Chinese official news agency announced that another government agency would receive permission to buy shares on the stock market. This was seen by everyone as a sign of new intervention, but no intervention took place. On August 23, the main news was the state's refusal to interfere in the affairs of the stock market - that is, the transition to the market policy that it intended to pursue in relation to the exchange rate regime.
All of this - along with several speeches in the official media, criticizing past leaders and tigers for over-meddling and suggesting strong group opposition to reform - is evidence of a power struggle. Given Xi Jinping's impressive record over the past two years, he is likely to emerge victorious. As with other developments over the past two years - the dynamic development of the services and private sectors, online retailing and online banking - he, perhaps more than anticipated, is betting on economic reformers, among whom the most prominent figure is remains Premier of the State Council Li Keqiang. Fighting rivals in the highest echelons of power and corrupt factions could push Xi even further in this direction.
However, Xi Jinping's communication style runs counter to the reform agenda. He is unable to revive the messianic hope for a transition to a market economy, characteristic of the past. Moreover, many Chinese investors are no longer the innocent market players they were. They have acquired serious personal interests, usually not conducive to economic development, primarily bloated real estate assets. As for the fight against corruption, it reinforces a sense of insecurity, which is already fueled by a slowdown in the economy, bad news from abroad, and now by uncertainty over the exchange rate. Those who are affected by all this are trying to hide or are looking for ways to escape: paradoxically, the link between the Shanghai and Hong Kong exchanges has recently become such a way out.
In this situation, rational analysis gives way to the laws of psychology. The economic boom in China continues, as evidenced by a 10,4% increase in consumer consumption compared to the same period a year ago (or this simple fact: in the first six months of 2015, the number of Chinese tourists visiting France increased by 48%).
The surplus of China's foreign trade balance is greater than ever, since now energy resources and raw materials cost it much cheaper, and foreign suppliers, for example, Gazprom, suffer from this. China's stock market crashes are frequent, so there is nothing extraordinary about it. And the change in the exchange rate regime should please those who are convinced that the yuan will soon become one of the world's reserve currencies. In general, growing pains are an inevitable consequence of structural changes in the economy. And it is precisely to such structural changes - the transition from excessive investment to consumption, from an infrastructure economy to a high-tech one, to the abandonment of a model that siphons raw materials from the whole world - that all reformer economists had previously unanimously called for.
Nevertheless, no one, with the exception of some opponents of the market economy, perceives the situation in this way. Believing in the myth of the painlessness of change, market economists and market players now seem to be mesmerized by a pessimistic scenario. And this, in turn, amplifies the negative impact of shocks caused by the general slowdown in the growth of the Chinese economy. The crashes in stock markets that have little to do with China indicate a broader trend: the global economy has been moving on thin ice for quite some time, supported only by zero interest rates and quantitative easing.
A typical example in this sense is the French stock market, a country in which China's export share is only 3,5%. China was a positive myth, as was the export of capital-intensive goods and luxury goods to the oil-rich countries. In theory, a sharp drop in prices for energy and raw materials should have the most positive effect on the mature consumer markets of those countries that are deprived of such natural resources. In fact, this does not happen: high excise taxes on energy resources, in fact, nullify the effect of falling prices (oil fell in price from $ 150 to $ 40 per barrel, and gasoline at gas stations - by only 10%).
The huge government debt makes imported deflation a negative factor as it increases the relative weight of that debt. Moreover, gigantic government spending prevents Keynesian policy of stimulating the economy by increasing budget spending, and quantitative easing, in fact, allows governments to preserve social subsidies, which played the role of shock absorbers in a downturn, but failed to ensure growth.
The pessimism that has reigned in world markets is not related to the real state of the Chinese economy. It was born of the end of the positive myth of China, which served as a model for all emerging market economies and as a counterbalance to the pessimism inherent in aging developed societies. Over the past year, we have witnessed the flow of large volumes of capital from developing and oil economies (by the way, from China - to a much lesser extent) to developed countries, where as a result bubbles in the stock market and in the real estate sector again inflated.
But now this influx is running out. China may turn out to be more resourceful and ambitious than developed countries other than the United States in moving towards a high-tech, service-dominated economy. But he needs to be clearer than before to indicate his intentions in terms of such a transition. Europe is being haunted by its own demons: on the one hand, the current level of public and social spending is becoming unbearable for many EU countries, and on the other, the Old World demonstrates a complete inability to transform a significant surplus of the foreign trade balance (now, when prices for raw materials are falling, and mining countries are vying with each other to dump fighting to maintain its market share) in measures to stimulate growth within Europe. All this has nothing to do with China: it just served as the embodiment of a positive myth for some time, and now it seems to us a symbol of our own inability to develop coherent policies that ensure economic growth.
The original was published in English on the website of the European Council on Foreign Relations