Its plummeting stock market doesn’t have much to do with its real economy.
FROM POLITICO | JULY 09, 2015
Over the past month, as Greece has occupied headlines, China has been rocked by a crashing stock market. The oscillations appear far from over, with the Shanghai exchange up 6 percent on Wednesday, having plummeted more than 30 percent in the weeks before, which still leaves the index up about 80 percent over the past 52 weeks. That amounts to trillions of dollars gained and then lost in a very short time.
There’s been no dearth of commentary about how dire this situation could be. “Forget About Greece, China is the Real Reason to Freak Out,” blared one typical headline. China’s growth model has had legions of skeptics for years, and the recent turmoil in its markets has provided a new peg for old concerns that China is headed for the much-dreaded hard landing of its economic system.
That’s not going to happen, at least not now.
All stock markets are questionable proxies for the health of the real economy, and China’s equity markets are even worse. Between the Shanghai Exchange laden with state-owned behemoth companies in old industries like steel and insurance and the Shenzhen Exchange with its tech emphasis, China’s markets nonetheless represent just a sliver of China’s actual economy. The shares are traded almost entirely by individual (retail) investors, and in person rather than online (though that is changing). These markets are dominated by citizens of the Beijing-Shanghai corridor or of the Pearl River nexus of Shenzhen-Guangdong and Hong Kong. Unlike American or European bourses, Chinese stocks are not woven into the fabric of retirement accounts or large institutional pensions or municipal budgets. They are speculative casinos, and everyone in China knows it (or should).
And these casinos have not over the past decades tracked actual economic growth. The Shanghai Composite crashed in 2007-08 and didn’t recover until recently; meanwhile, China glided through the global financial crisis largely unscathed. The index also meandered at various periods in the 2000s even as China’s gross domestic product was soaring.
To argue now, as many have, that the collapse of this mini-bubble is directly connected to dire weakening of the Chinese economy is to ignore just how uncorrelated these equity markets and China’s overall economy have been.
There is a legitimate debate about whether China is deteriorating economically or simply amid a massive shift in the mix of its economic activity away from making stuff and building stuff and toward consuming stuff itself. That debate is heated in China and Hong Kong as well. The movement of stocks may be a convenient peg for the debate, but that doesn’t mean that these moves offer a tell one way or the other. If they did, then you should have heard voices proclaiming a new China boom early this year.
Concerns about the viability of China’s growth model have punctuated the past 15 years, ever since China joined the World Trade Organization in December of 2001 and began a vertiginous growth path of double-digit GDP, flooding the world with low-cost manufactured goods and building megalopolis from scratch. In the past three years, under the aegis of a powerful and even more autocratic leader, Xi Jinping, China’s economic growth as measured by GDP has slowed considerably, to under 7 percent this year for the first time in decades.
The goal of the current government is to move China away from the growth model that propelled the country to become the world’s second-largest (or largest depending on the calculations) economy today. How China grew so fast without major hiccups is astonishing; it would be even more astonishing if it manages that transition currently underway. Yet, for the moment, while excessive construction, bad loans, too much real estate investment and still sclerotic state industries are issues, that transition appears to be happening. Services and consumption are increasing as a percentage of economic activity even as infrastructure spending and investment are slowing.
And then there are the stock markets. If you are in the middle class (or more likely what we would call upper-middle class) in Beijing or Shanghai or Shenzhen, and you have some disposable income that you wish to save and invest for the future, your options are limited. Chinese citizens cannot invest outside of China. That leaves only a few options for their disposable income: Keep it in cash; buy luxury goods; go to Macau and gamble; buy real estate; invest in stocks. That’s about it.
Until recently, the preferred options were real estate and Macau. But the Chinese government has cracked down on both: on real estate by raising the cash down limits, and on Macau by restricting various junkets out of legitimate concern that Macau had become an unofficial way to get money out of the mainland. Not all of these restrictions have worked, of course, but money has consequently poured into stocks.
The volatility and the challenges of closed-capital system are real issues for China, its governors and its people. But the flip side is that none of these could be issues without the Chinese system succeeding in generating disposable incomes for hundreds of millions of people who had none 25 years ago.
The readiness of Americans to jump to the conclusion that China is on the verge of collapse and that its stock market bubble is proof would do well to remember that the Nasdaq index in the United States peaked in March of 2000 and didn’t get back to the same highs until this past March, 15 later. The Internet bubble and the telecom collapse did lead to a recession in 2001, which deepened after the attacks of 9/11. But that bubble was not a symbol of all that was wrong in the American economy, nor did the rise and fall and then slow rise portend chaos in our system.
China may yet face days of reckoning, as might we all. But this recent bubble, and then burst, and then perhaps bubble again in China’s stock markets is being misused and misread as a symbol. It is not.