What is the long-term impact on China of the recent fall in shares value?

In today’s guest post Andrzej Bolesta, author of China and Post-Socialist Development, provides his insight into why the current situation will have minimal long-term impact on China.

Dr Andrzej Bolesta

Recently the media have been writing a lot about China’s stock exchange. They have been speculating about the reasons for the fall in shares value and about the possible long term trends impacting China’s development trajectory.

Between the middle of June and the end of August, Shanghai’s stock exchange composite Index fell by around 40 percent, whereas Shenzhen’s by around 45 percent. Although for many investors and analysts it is important to see short term causes and consequences of the current “correction”, for researchers like myself, the paramount issue is whether the current situation is part of a larger package of occurrences, which might impact China and thus the world.

Limited long-term impact

My opinion is that the current situation will have a minimal long‐term impact on China, if any. China’s other challenges are way bigger than the recent troubles related to the stock market.

Firstly, bear in mind that the indexes are still higher than when the boom started last year. This boom is difficult to associate with robust economic growth, as the “new normal” pace is not a double digit figure. Consequently, it is also difficult to associate the current correction with some specific troubles of the Chinese economy.

“there are many things about the companies listed on the stock market that we don’t know…”

Naturally, there are all sorts of factors which are believed to have contributed to the current state of affairs; for example, the financial supervisory authorities have manipulated the regulations concerning the availability of credit to purchase shares, the August devaluation of the RMB has been perceived as an illustration of another weakness of the Chinese economy, speculations that the US Federal Reserve will increase interest rates initiated the flight of the dollar back to America.

Secondly, and perhaps more importantly, there are many things about the companies listed on the stock market that we don’t know. Many of them are state‐owned enterprises with
only limited share available for trading and China’s economy is not the most transparent one.

Consequently, these companies’ standing often depends on non‐market, political factors. Hence, investors have a limited knowledge upon which to act. This contributes to the level of uncertainty, which, in turn, may perhaps generate fluctuations and these fluctuations can be perceived as irrational.

Active macroeconomic policy

Thirdly, to try to amend economic problems, China still has room for active macroeconomic policy. Unlike the US and Europe, it can comfortably continue lowering its interest rates. Moreover, its central government’s debt is comparably low.

Fourthly, the impact of the current situation on the Chinese citizens, as broadly argued, will be rather insignificant. The stock market capitalization as compared to the national GDP is lower than in advanced economies and thus their influence on the national economy is limited. Moreover, the shares are significantly dispersed among many small scale private
investors.

“So whatever happens in China does not stay in China”

Nevertheless, make no mistake. Whatever happens in China has most likely either short term or long term, or both, consequences for the rest of the world.

Soon to be the biggest economy in the world (according to purchasing power parity estimates it already is), China is an integral and deeply integrated component of the global economy. Shanghai is becoming one of the capitals of the financial world.

So whatever happens in China does not stay in China. Consequently, many stock markets around the world have followed suit and recorded falling indexes. However, what may worry the rest of the world the most is China’s slowing rate of economic growth, inevitably perceived to become a long term trend. The slow down affects primarily China’s suppliers of raw materials and energy resources, then the economies with a large share of export directed to China, for example, as part of the regional production chains, and then everybody else.

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The Illusion of China’s Economic Liberalization

For more insights into China and it’s systematic following of the Post Socialist Development State (PSDS) model why not take a look at China and Post-Socialist Development which is available to purchase here from the Policy Press website. Remember that Policy Press newsletter subscribers receive a 35% discount – if you’re not a member of our community why not sign up here today?

The views and opinions expressed on this blog site are solely those of the original blogpost authors and other contributors. These views and opinions do not necessarily represent those of the Policy Press and/or any/all contributors to this site.

The Illusion of China’s Economic Liberalization

China has become an economic superpower by  Author and academic Andrzej Bolesta, author of China and Post-Socialist Development 

Dr Andrzej Bolesta

The leading theme of the proceedings of the Chinese rubberstamp legislature – the National People’s Congress – is always reforms.

Recently, hopes have been high. The administration of president Xi Jinping and premier Li Keqiang has been promising more market forces in China’s economy. Despite this, in recent times, China’s economic liberalization has been an illusion rather than a fact and this will not change any time soon.

The assumption has been that the interventionist model, characterized by the state’s heavy involvement in the economy, which dominated the first 30 years of reforms and opening up has come to exhaustion.

Why? The implementation of the state interventionist model has led to a growth in social inequalities, significant damage to the natural environment and, perhaps most recently, an almost three percent drop in economic growth – the lowest in 24 years.

Market forces

The logic has been that if a lack of market forces has brought upon China these, to put it mildly, worrying trends, then we need to introduce more market forces to amend the situation. “We need more market forces” – has been the message of the current state administration. And what has happened since the calls for more market reforms began? In terms of economic liberalization, not much.

Since the commencement of economic transformation by Deng Xiaoping in 1978 China has undergone an extensive process of liberalization. A somewhat market-based economy was constructed. But with the administration of president Hu Jintao and premier Wen Jiabao from 2003 the liberalization process essentially halted and China has since only reluctantly been fulfilling its obligations related to its WTO membership.

“The authorities have little intention of continuing economic liberalization”

The current drive towards economic liberalization is also an illusion. Some reforms will continue but the progress towards a greater role of the market in economic affairs will be slow, painful and perhaps full of retrenchments. The authorities have little intention of continuing economic liberalization. There is an important reason for this.

Shanghai – economic capital of China Photo credit – wikipedia

The higher echelons of the Chinese communist party long ago chose the model of China’s development and since the beginning of transformation the general idea has hardly been altered, despite the plethora of analyses that claim to the contrary.

This model can essentially be summarized as an attempt to employ the systemic, institutional and policy solutions used by Japan and Korea during their high growth periods.

East Asian development model

It is true that China is very different from both countries. It is much larger and more decentralized; it has a different historical institutional background as it was a socialist country; and finally, it attempts to imitate Japan and Korea at a time when the advancements of globalization in a way impose a great deal of openness on national economies, thus making some of the Japanese and Korean historical policies incompatible with the arrangements of the contemporary world.

Nevertheless, with all its indecisiveness and reform retrenchments, China’s leadership has vigorously implemented the East Asian development model as extensively as the internal and external conditions have allowed – a model responsible for the most spectacular developmental advancements of mankind in the second half of the twentieth century.

“In this model, however, there is hardly any space left for further economic liberalization”

This implementation is clearly visible when we examine China’s trade policies to support export and to discriminate import, when we observe the deliberate policy of development of certain sectors of export-orientated production; when we see economic nationalism becoming, next to political nationalism, the leading state ideology; and when we see how the leadership wants to keep the society subordinate and obedient and at the same time supportive of the national development trajectory, and does so by keeping the social sphere weak and unorganized and by, nevertheless, creating conditions for gradual improvements in the welfare.

This model has largely been a success. China has become an economic superpower. In this model, however, there is hardly any space left for further economic liberalization. Further liberalization will only be possible once domestic companies reach the level of sophistication that enables them to control the domestic market in the free market environment, and to effectively compete on the global arena, as was the case of Japanese keiretsu and Korean chaebols.

This moment has yet to arrive. Chinese authorities continue to believe that more competition from foreign actors will negatively affect the domestic business sector. Chines authorities also believe that the social and environmental problems their country is currently facing cannot be solved by market forces. And this is the perfect excuse to continue following its long-term model of development with an intrusive and interventionist state. Chinese leadership will talk about economic liberalization as it plays the global game, for China is a part of the global economy. And the global game is to praise more market, more free trade, more economic liberalization. But it will not liberalize.

Dr. Andrzej Bolesta
@a_bolesta

China and Post-Socialist Development is available for purchase from our website here (RRP £70.00). Don’t forget Policy Press newsletter subscribers get a 35% discount when ordering through our website. If you’re not a subscriber yet why not sign up here today and join our Policy Press community?

The views and opinions expressed on this blog site are solely those of the original blogpost authors and other contributors. These views and opinions do not necessarily represent those of the Policy Press and/or any/all contributors to this site.