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Market’s Dive Could Delay Economic Reforms in China Market’s Dive Could Delay Economic Reforms in China
(about 7 hours later)
HONG KONG — China’s stock market tumble has presented the government of President Xi Jinping with a searing test of its commitment to overhaul the country’s financial system and open up the state-controlled economy. HONG KONG — China’s stock market tumble has presented the government of President Xi Jinping with a searing test of its commitment to overhaul the country’s financial system and open up the state-controlled economy.
Building off the work of his predecessors in the last three decades, Mr. Xi has been introducing competition into the banking industry, overhauling state-owned companies and making it easier for foreign investors to buy Chinese stocks. But the pace of reform may slow if the stock market slump persists, or even accelerates.Building off the work of his predecessors in the last three decades, Mr. Xi has been introducing competition into the banking industry, overhauling state-owned companies and making it easier for foreign investors to buy Chinese stocks. But the pace of reform may slow if the stock market slump persists, or even accelerates.
The stock market represents the swirl of social, political and economic forces at play in the reform efforts.The stock market represents the swirl of social, political and economic forces at play in the reform efforts.
Tens of millions of individual investors flocked to stocks in the last year, many of them reassured by statements in government media that the stock market had become a stable, more reliable place to invest. Now, they face devastating losses.Tens of millions of individual investors flocked to stocks in the last year, many of them reassured by statements in government media that the stock market had become a stable, more reliable place to invest. Now, they face devastating losses.
The China Securities Finance Corporation, a government agency that lends money to brokerages so they can loan to investors who want to buy shares, said on Wednesday morning that it would provide more financing for purchases of shares in small and medium-size companies, while continuing to support shares of large companies. The central bank said soon afterward that it would continue providing liquidity for the finance corporation as well.The China Securities Finance Corporation, a government agency that lends money to brokerages so they can loan to investors who want to buy shares, said on Wednesday morning that it would provide more financing for purchases of shares in small and medium-size companies, while continuing to support shares of large companies. The central bank said soon afterward that it would continue providing liquidity for the finance corporation as well.
Shares nonetheless plunged sharply in early trading on Wednesday, with the Shanghai stock market falling more than 6 percent. Shares nonetheless plunged sharply on Wednesday, with the Shanghai stock market falling almost 6 percent.
Since June 12, the market has lost $3.2 trillion, roughly a third of its value. And the true extent of the pain could be even greater.Since June 12, the market has lost $3.2 trillion, roughly a third of its value. And the true extent of the pain could be even greater.
Nearly half the listings on China’s exchanges ceased trading by Wednesday morning, mostly because the companies had sought trading halts until further notice, although some listings were also suspended by regulators.Nearly half the listings on China’s exchanges ceased trading by Wednesday morning, mostly because the companies had sought trading halts until further notice, although some listings were also suspended by regulators.
Those listings being halted, suspended or frozen by steep falls are disproportionately smaller companies, which had been the most popular with ordinary investors.Those listings being halted, suspended or frozen by steep falls are disproportionately smaller companies, which had been the most popular with ordinary investors.
For a government that loves absolute control, getting pushed around by the markets is an unsettling experience. It has prompted quick action by Beijing to try to prop up share prices.For a government that loves absolute control, getting pushed around by the markets is an unsettling experience. It has prompted quick action by Beijing to try to prop up share prices.
While moving aggressively, the Chinese government has relied mainly on market-oriented tools. It has lent money to brokerages for stock purchases, for example, and did not publicly have government agencies buy shares themselves, as Hong Kong did in 1998.While moving aggressively, the Chinese government has relied mainly on market-oriented tools. It has lent money to brokerages for stock purchases, for example, and did not publicly have government agencies buy shares themselves, as Hong Kong did in 1998.
Scott Kennedy, director of the project on Chinese business and political economy at the Center for Strategic and International Studies, said, “I think for them, they figured they had to get involved for now, even though it’s not their first choice.”Scott Kennedy, director of the project on Chinese business and political economy at the Center for Strategic and International Studies, said, “I think for them, they figured they had to get involved for now, even though it’s not their first choice.”
But the financial losses are starting to stir a populist reaction on social media in China. Some are calling for the government to play a more active role, even bailing out investors who behaved recklessly. Others are accusing Beijing of bumbling its intervention.But the financial losses are starting to stir a populist reaction on social media in China. Some are calling for the government to play a more active role, even bailing out investors who behaved recklessly. Others are accusing Beijing of bumbling its intervention.
“When the crisis spreads and the middle class is being wiped out, every government will rush to the rescue, no doubt about it — when someone is about to pass out from bleeding, it makes little sense to discuss his lifestyle or dinner plans,” Ye Tan, a popular financial commentator in Shanghai, said in a telephone interview.“When the crisis spreads and the middle class is being wiped out, every government will rush to the rescue, no doubt about it — when someone is about to pass out from bleeding, it makes little sense to discuss his lifestyle or dinner plans,” Ye Tan, a popular financial commentator in Shanghai, said in a telephone interview.
So far, government officials have not yet signaled a change in overall strategy.So far, government officials have not yet signaled a change in overall strategy.
In a speech to overseas Chinese business executives on Monday, Prime Minister Li Keqiang did not mention the stock market upheavals.In a speech to overseas Chinese business executives on Monday, Prime Minister Li Keqiang did not mention the stock market upheavals.
“We have the confidence and capacity to cope with all manner of risks and challenges, and to advance sustained, healthy economy development,” Mr. Li told the gathering in Beijing, according to Xinhua, the official Chinese news agency.“We have the confidence and capacity to cope with all manner of risks and challenges, and to advance sustained, healthy economy development,” Mr. Li told the gathering in Beijing, according to Xinhua, the official Chinese news agency.
But the losses are already delaying at least one big economic reform. In an effort to reduce its control over the economy, the government wants to sell stakes in big, state-owned companies. But the Shanghai and Shenzhen stock markets suspended on Saturday all initial public offerings until further notice.But the losses are already delaying at least one big economic reform. In an effort to reduce its control over the economy, the government wants to sell stakes in big, state-owned companies. But the Shanghai and Shenzhen stock markets suspended on Saturday all initial public offerings until further notice.
The government had encouraged the stock market rally, since strong demand for shares would have made it much easier to sell their shares of state-controlled businesses. Now, their efforts to shore up the stock market are actually reinforcing the dominance of state-owned enterprises.The government had encouraged the stock market rally, since strong demand for shares would have made it much easier to sell their shares of state-controlled businesses. Now, their efforts to shore up the stock market are actually reinforcing the dominance of state-owned enterprises.
With the new lending initiatives, those state-owned companies, viewed as too big to fail, are actually performing well, as the shares of smaller, private sector business take a major hit. Shanghai-listed shares of PetroChina, the state-controlled oil giant that has some of the closest links to the Chinese Communist Party of any company, have surged 28.8 percent since the start of last week. The company’s New York-listed shares, where no special financing is available, have fallen 5.3 percent in the same period.With the new lending initiatives, those state-owned companies, viewed as too big to fail, are actually performing well, as the shares of smaller, private sector business take a major hit. Shanghai-listed shares of PetroChina, the state-controlled oil giant that has some of the closest links to the Chinese Communist Party of any company, have surged 28.8 percent since the start of last week. The company’s New York-listed shares, where no special financing is available, have fallen 5.3 percent in the same period.
The fate of the other reform initiatives is less clear.The fate of the other reform initiatives is less clear.
Plans are in the works to connect the Shenzhen stock market to the one in Hong Kong, allowing money and investors to move more freely. It would follow a similar mechanism between the Shanghai and Hong Kong exchanges.Plans are in the works to connect the Shenzhen stock market to the one in Hong Kong, allowing money and investors to move more freely. It would follow a similar mechanism between the Shanghai and Hong Kong exchanges.
But such programs loosen the government’s grip over capital flows. If the stock market weakness continues, Beijing may want to maintain control, at least for a bit longer.But such programs loosen the government’s grip over capital flows. If the stock market weakness continues, Beijing may want to maintain control, at least for a bit longer.
Leading economists in China say that the economy still needs further reforms to reduce bureaucratic control. But they also acknowledge that the stock market debacle may affect the pace of that reform.Leading economists in China say that the economy still needs further reforms to reduce bureaucratic control. But they also acknowledge that the stock market debacle may affect the pace of that reform.
“In some areas, it does make sense to be more cautious and gradual,” said Yu Yongding, an economist at the Chinese Academy of Social Sciences in Beijing. “You can see from what’s happened in the stock market that our regulatory capacity over markets is still quite poor — we can’t keep a handle on things.”“In some areas, it does make sense to be more cautious and gradual,” said Yu Yongding, an economist at the Chinese Academy of Social Sciences in Beijing. “You can see from what’s happened in the stock market that our regulatory capacity over markets is still quite poor — we can’t keep a handle on things.”
Tao Ran, a professor of economics at Renmin University in Beijing, said the panicky stock market downturn would probably hurt the Chinese government’s appetite for deeper changes to the economy, but added that the downturn paradoxically strengthened the case for such changes.Tao Ran, a professor of economics at Renmin University in Beijing, said the panicky stock market downturn would probably hurt the Chinese government’s appetite for deeper changes to the economy, but added that the downturn paradoxically strengthened the case for such changes.
“People may say that this strengthens the case for not changing things,” Professor Tao said. “But I think that this has happened exactly because reform has not been done in the right way.”“People may say that this strengthens the case for not changing things,” Professor Tao said. “But I think that this has happened exactly because reform has not been done in the right way.”
He added: “So far the rescue policy has not been working well. They overestimated their own capacity to control, and now people are voting with their feet.”He added: “So far the rescue policy has not been working well. They overestimated their own capacity to control, and now people are voting with their feet.”
That outcome does not appear to be what anyone envisioned when China’s government cabinet issued guidelines in May of last year on modernizing China’s capital markets, including stocks, futures and bonds.That outcome does not appear to be what anyone envisioned when China’s government cabinet issued guidelines in May of last year on modernizing China’s capital markets, including stocks, futures and bonds.
“Respect the laws of the market, and abide by market rules, pricing and competition to maximize gains and optimize efficiency,” the guidelines said. “Give the markets a decisive role in allocating resources.”“Respect the laws of the market, and abide by market rules, pricing and competition to maximize gains and optimize efficiency,” the guidelines said. “Give the markets a decisive role in allocating resources.”