By John Reizner |
China’s economic destiny and the autocratic rule of the Communist party are inextricably linked to each other in this the world’s most populous country. Chinese leaders dictate the laws its citizens must obey and tightly control the country’s centrally planned economy.
It is well known that the continued rule of the Communist Party in China is predicated on two pillars: the Party’s military might and the remarkable economic “miracle” that has transformed the country since Deng Xiaoping in 1978 unleashed the forces of the free market in China. Billboards at that time touted the slogan: “To Get Rich is Glorious.’” The Chinese have proven themselves to be extremely hardworking, industrious and to be prodigious savers and investors in the Shanghai stock market.
Former President Clinton normalized trade relations with China during his term – a policy which allowed major companies such as Walmart and a succeeding throng of American corporations to out-source their manufacturing supply chains to China. This policy contributed mightily to the resounding success of the Chinese economic resurgence and providing jobs and the road out of poverty for populations migrating en masse from rural areas to the cities.
America effectively engaged in a de facto policy of nation-building in China – getting almost nothing in return. American companies have little access to Chinese markets, while millions of American manufacturing jobs were sacrificed for scarce return as China became industrialized and more prosperous.
American policy solidified the grip of the Communist Party on its people in through the jobs-creating wealth that our corporation’s investments provided. Bill Clinton is greatly admired in China as the man who partially made possible the rise of the Chinese the economic juggernaut.
The Chinese regime gains its legitimacy from the ability of its rulers to give its masses the fruits of a rapidly growing economy and to participate in the country’s wealth creation.
Any untoward economic event, shock, or series of policy miscalculations that might seriously endanger this growth model might have negative effects on the willingness of at least part of the population’s willingness to tolerate a dictatorship that is not always benevolent.
The recent destabilizing 30% crash in the Shanghai stock market after it rose more than 80% in recent months has caused the Chinese leaders to react with trading restrictions on many stocks. The stock market was goosed by liberal margin lending regulations - when the bear market intensified, forced selling materialized.
This event has garnered worldwide attention as mom and pop investors in China had been betting their life savings with tacit government approval on the premise that Shanghai stocks would continue to ascend. Those hopes were dashed when the market started to slide, though those that had entered the market earlier likely still had gains.
However, it may be inferred from Franklin Templeton's fund manager Mark Mobius's statement today that the Chinese markets are near "the point of capitulation" that investors may be well-served by looking to buy here.
It was reported today that Chinese Premiere Li indicated that the country is " stabilizing." The hope is that the Chinese government will rescue the stock market situation and find ways to prop up the market. One of the government's tactics is to prevent many issues from trading and allowing investors to pledge their homes as collateral to buy more stocks, having the effect of stemming further margin calls. The government is playing a game of high stakes poker with these Chinese investors’ savings.
Many observers speculate whether this mini-crash and the ensuing destruction of wealth may be the event whose consequences may reverberate through the Chinese economy – causing systemic shock in other sectors such as the always volatile real estate market. Many Chinese citizens had rotated their savings from investing in property to plunging into stocks on the Shanghai exchange. They have been left holding the bag with their savings given a large haircut.
I have written articles on this website how the direction of the Chinese stock market may be a leading indicator of our stock market’s direction. The cracking of the equities (and real estate) bubble shortly before the 2008 financial crisis was preceded by a biting correction months before in the Shanghai stock market. We will see if the swoon in China continues as that bear market has already spooked the American stock market.
The Chinese government's attempt to stem the selling tide in Shanghai stocks is reminiscent of the October 1929 stock market crash in the U.S. when major players such as the Vice Chairman of the NYSE Richard Whitney and a cadre of bankers purchased large blocks of U.S. Steel and other major corporations’ stocks at prices that were above the market.
But as events unfolded, the group’s plan proved to be a futile attempt to bid up equities during the 20th century’s greatest stock market debacle. America shortly sank into a depression that did not see its end until after World War II. The Dow Jones Industrial Average would lose 90% of its value from 1929 to 1932.
Some commentators are declaring that not only is there now a stock market bubble in China but a real estate bubble one as well.
I have been following various world stock markets and economic trends dating back to the early 1980’s. There have been numerous real estate and property market “crashes” or “hard landings” in the Hong Kong property market over the years– and in time China’s property market has always recovered.
I would not underestimate the will or the ability of the authorities in China to prop up real estate or its stock market by any means available to them or to support a recovery if there is a “hard landing.” If such an event occurs affecting the pocketbooks of a large cross-section of Chinese citizens, it would not be surprising if political dissent emerged if their leaders finally lose their grip on the economy.
When a stock market wants to decline, it may be difficult to stop it even by instituting trading halts or by asking large stockholders not to sell their holdings as has occurred in Shanghai. When the affected stocks are reopened for trading, they may continue their freefall. No one really knows at this point.
We are left with the game of speculation where one wonders when and if the leaders of over one billion people may at last lose their grip on their economy – and thus jeopardize their longstanding political power.