TOKYO: Panic is in the air as China suffers its biggest one-day stock plunge since 2007. It shouldn’t be. The 8.5 per cent slide in the Shanghai Composite Index is actually a development that could leave China better off eight years from now.
I’m focusing on eight both because it’s an auspicious number in Chinese folklore (the Beijing Olympics didn’t begin on 8/8/08 by accident) and Beijing’s idea of nirvana. Growth returning to 8pc (relative to this year’s 7pc target) would buttress President Xi Jinping’s reformist bona fides. Instead, stocks fell by that much Monday as Xi’s magic has lost potency. Why is that a good thing? It’s at once a reminder that rationality is returning to mainland markets and a message to Xi to stop putting the financial cart before the proverbial horse.
Since mid-June, when shares began sliding, Xi’s market-rescue squad has tried everything imaginable: interest-rate cuts, margin-lending increases, bans on short selling, a moratorium on initial public offerings, hauling supposedly rogue traders in for a talking to, ordering state-run institutions to buy shares, halting trading in at least half of listed companies, you name it. What Xi hasn’t tried is upgrading the economy and financial system in such a way as to help the stock market thrive.
To find out what he should do next, Xi could do worse than to check in with Henry Paulson. Even though Paulson might regard with scorn China’s love of the number eight, it was on his watch as Treasury secretary in 2008 that the US had its own brush with financial collapse.
Paulson has been merciless in his all-hype-and-no-fundamentals critique of Xi’s government. “China is especially vulnerable at this point because while its economy has grown and matured, its capital markets have lagged behind,” he wrote in the Financial Times.
“It is no surprise that those ideologically opposed to markets would use recent events to make the opposite argument — that to prevent market instability, Beijing should slow the pace of financial liberalisation or perhaps even abandon market-based reforms altogether.”
Yet, he argued, “while Beijing’s instinct to protect investors is understandable, the best way of doing so is to create a modern capital market.”
That’s why ambivalence toward Xi’s titanically large market interventions could be a positive. It refocuses Beijing on what’s needed to re-create the vibrant markets that prevail in New York and Hong Kong. Xi’s Communist Party has tried and failed to stabilize things by edict. In fact, heavy-handed manipulation has set back Beijing’s designs on making the yuan a global reserve currency and getting Shanghai shares included in MSCI’s indexes.
As Paulson points out, no nation has ever achieved high-income status with a closed market system that misprices risk. The longer Xi’s men delay adopting international standards of capital allocation, transparency and basic trust in markets, the bigger the odds China will experience a Japan-like crash, circa 1990.
By arrangement with Washington Post-Bloomberg News Service
Published in Dawn, July 29th, 2015