The Chinese financial markets are looking ever more cut off from real world facts and figures. A massive bubble, now fuelled by the savings and hopes of millions of ordinary workers, is underway. A crash would have an enormous impact both on world markets, and possibly on the political stability of the Chinese regime.
In the old, and increasingly financialised economies of the West, we often tend to equate the economy with the stock market, seeing the main indexes as an exact thermometer stuck up the rear end of the nation at large. But there are other ways to raise capital than the stock markets, and other countries where those markets, until recently, have been more of a side show to the sectors of the economy where the real action was, a casino, if you will, having its ups and downs largely independently of the great tides of capital.
The Chinese boom, fuelled by exports, and mainly financed through state run banks, in a Mercantilist grand plan system that seems to utterly befuddle western economists (after all what first world nation, other than Great Britain, and arguably not even them, rose to industrial prominence though a laissez-faire system?), has been going on for north of a decade, with 10 percent and more GDP growth per annum. But for most of those years the stock market, weighed down by lack of faith and tradition, excessive regulation, and the fact that a big chunk of the export manufacturers were propped up by bad loans, almost didn't register a pulse. If the Chinese indexes were any more flatline, they'd have to break out the EKG machine to decide whether to make a trade, or do the eulogy.
Unlike the average American consumer, who's been running a negative savings rate for a couple of years now, first dipping into assets, and then credit, the frugal Chinese worker has been hoarding about 30% of household income. But the Chinese, by circumstance and temper were old fashioned savers, squirreling away their nest eggs in plain old bank accounts. The lack of sophisticated wealth-management services and products both contributed to high savings, and channelled those savings away from speculation.
But then, a few years ago, things started changing. Regulations were eased, the sheer volume of capital flowing into the Chinese economy needed outlets, and people who already felt they had the necessities and eventualities of life covered, were looking for investments with a bit more zing to them than the bog standard savings account. After all, you're really not a high roller unless you tux up and sit down at the Baccarat table. The indexes suddenly took off, following, and then even overtaking the Shanghai skyline, as it shot towards the smog filled sky.
The
CSI 300 index, a combination of the yuan-denominated A-shares of the biggest firms on China’s two big exchanges, in Shanghai and Shenzhen, is up 88% this year, and silly figures over the last few years.
Now, there's no doubt that the Chinese economic miracle is a very real phenomenon. Industry and infrastructure, not just paper assets, have grown like kudzu in a Georgia ditch. Steel production, always a fair barometer for the industrial might of a nation, now dwarfs the rest of the world. Smog, that exhalation of real economic activity that once enveloped the industrial cities of Britain, with the odd Jack the Ripper lurking in the coal particle filled fog, can almost be cut with a knife in the Chinese metropolises. But progress like this carries with it dangers of its own, of which environmental problems is just one.
Another danger is extrapolating present trends into the future. Human beings, though the most adaptable of animals, tend to consider just about everything that has lasted for more than a few years as the norm. Like the expectation that the sun will come up tomorrow morning, as it always does, we get used to things being as they are. If the stock market and the economy has been growing by double digits every year, we see no reason why it would not do so in the future. And even those who know that such is not the case, will be loath to sit on the sidelines as their neighbours reap beaucoup profits and invite you over to watch the big game on their even bigger super duper deluxe widescreen plasma TV with surround sound system. After all, you can't fight the trend. And, being smarter than the rest, you'll surely have the nous to cash in your chips before the jig is up, handing the hot potato over to a bigger sucker.
It could be argued that with the average price to earnings ratio (the number of years, at present earnings, it would take you to make back the money you spent on buying the stock) of the CSI 300 at 43 (while the more mature Hong Kong market is closer to the international norm of 17), the jig is sounding a tad ragged already, with the drummer slumped across the skins, the bass player obliviously noodling away, lost in his own dreams of fame and riches, and the fiddler, hopped up on intravenous injections of easy credit, doing his best impression of
Pete Townsend and wielding his violin like a weapon of war. Everyone is all of a sudden into stocks. Cab drivers, maids, and Buddhist monks are putting their savings on the table, hoping for the big score.
Some of the heavy hitters in the market are perking up their ears, suspecting that the music is just about over, and looking for a chair to park their backsides on. Li Ka-shing, Asia's richest man, had this to say when he recently presented the numbers for his own companies: "As a Chinese, I am worried about the [mainland] stock market," adding that China's stock valuations "must be a bubble" and prices are likely to decline.
Another billionaire, Henderson Land Development chairman
Lee Shau-kee, dubbed "Asia's Warren Buffett", said mainland investors were fast losing their senses.
Lee said investors were "crazy. [...] Investors in the mainland are too keen to win in the stock market, chasing stocks no matter how high prices are, which is irrational."
People's Bank of China Governor Zhou Xiaochuan said on May 6 that a bubble might be building in the Chinese markets. "While there is no evidence that inflation is getting out of control, the central bank is watching asset prices", he said. The central bank has raised interest rates three times since April last year and increased bank reserve ratios seven times in an effort to rein in speculative fever.
As China's importance to the world economy has increased, tremors in the Chinese markets ripple through the international markets in a way they never did before. A small foreshadowing of the shape of things to come was felt in late February, when the Chinese markets convulsed and crashed 9%, dragging markets down across the globe, wiping more than $3.3 trillion from the market value of equities worldwide.
There is also the question what sort of impact a massive financial crash would have on the social and political situation in China. While the impression from outside is one of a society steeped in optimism and stability, the truth is quite a bit different. The blessings of the frantic economic growth in China are by no means evenly distributed, and brings with it new sets of problems.
While the industrialised coastal regions are a crucible of activity, the vast rural hinterland, where most of the Chinese population still reside languishes in relative poverty. That poverty is deepened by the inflation spilling out from the docks of Shanghai where wealth and prices are rising. The inevitable result is social unrest. Riots, and regular battles against police forces have become routine. One should remember that this disparity and resentment is the main factor that Mao rode to power.
Following the Tiananmen Square protests of '89, order was restored partly through the regime clamping down. But it was maintained mainly through an unstated social contract between the (nominally) Communist Party and the middle classes. The Party would guarantee economic progress and rising incomes in return for keeping power. That compact has held in the years since. But what happens when (not if) the economy hits a downturn, possibly in combination with a massive stock market crash that would wipe out the life savings of a lot of formerly upwardly mobile citizens?