July 22, 2015 |
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21st Century China Opinion
Chinese government slaps the invisible hand  
From the source

"China's market is also shaped by the heavy hand of the government, which makes decisions about what companies can list shares, when to promote stock rallies and, now, how to intervene when prices plummet. The government, in other words, views the market as a policy instrument, a mechanism to fulfill its political and economic goals. The result can be a volatile market that swings from boom to bust.

" 

 
 
Our take 
 

To be sure, the sell-off was scary and exposed major weaknesses in the government's regulatory oversight. Margin financing should never have been allowed to grow so fast in the first place, from RMB1 trillion at the beginning of the year to RMB2 trillion by May. 


The reaction of the government to try to save the market, however, is even more damaging in the medium-term. First of all, the authorities are putting some of the blame on short-sellers and even foreign conspirators. This will delay serious reform in the financial market such as an expansion of share borrowing and an enlarging foreign portfolio investment. Second, the government has violated fundamental property rights by not allowing major shareholders to sell their shares for six months. In effect, a major part of the assets of some of China's wealthiest people has been frozen. This may cause some of them severe liquidity issues, as they cannot get cash flows from selling their shares. This also means they cannot, for example, repay their debts. It also could mean that they will have to defer or forgo consumption. Both will have negative consequences for the economy in the second half of the year. 


Perhaps most importantly, why would entrepreneurs want to start major businesses that are listed in the domestic market when their shares can be locked up by the government without any warning? Investors that are thinking of delisting their companies in the U.S. and listing in China must be having serious second thoughts at this point. Finally, the intervention continues to foster moral hazard among domestic investors, which is a major barrier to financial reform. Why would investors do serious research on companies when the prices of the securities are almost entirely driven by government policies? Recent events have shown once again that the Chinese government values stability and control above all other objectives, including reform. 

 

Field Notes from China:
Selections from
the
Chinese-language Media
The 'China collapse theory' is a ideological weapon of the West
"中国崩溃论"：西方的意识形态武器
  

Summary: The "China collapse theory" has been around for as long as the Chinese Communist Party (CCP) has run China. In the period immediately following Mao Zedong's death in 1976, many wondered what could hold the country together now that the Chairman was gone. After the Tiananmen Square crackdown and the dissolution of the Soviet Union, it seemed inevitable that China would soon run out of Marxist gas. More recently, the spread of the Internet was certain to act like a universal acid, eating away the last vestiges of the communist system. Most recently, David Shambaugh of George Washington University penned a widely read and controversial article in the Wall Street Journal arguing that while he could not predict the precise timeline, "endgame of Chinese communist rule has now begun." Predictably, there was immediate pushback in the Chinese press. But now, some three months later, comes an article in the Qiushi, the most influential theoretical journal published by the CCP. The author, an assistant professor of Marxism at Xinjiang Normal University, dismisses of the "collapse" articles, which is to be expected. What's interesting here is that he offers suggestions as to how China can combat the spread of the genre.   

 

Excerpt from the story: "China must begin to treat the 'collapse theory' as an inevitable growing pain. Political practice shows us that during the process of weak and developing nations becoming stronger, they will be constrained by stronger powers. In any social power structure, a rising power will become the stronger power's potential rival. Furthermore, as rising powers try to actively participate in global governance, they will be perceived by the dominate power as threatening the status quo. ... Whomever has the strongest and most influential media will control the global conversation. Today, this is the West, including Reuters, the BBC and The New York Times and whatever these media outlets say occupies the dominant position. When we compare mainstream Chinese media and mainstream U.S. media, it's clear that whether we are discussing target audience or global influence, there is a wide gap between the two which China must expend a great deal of effort to close. If China wants to combat negative public opinion, constructing a world-class and influential media platform is a prerequisite." 

 

Source: Qiushi

The two orders of US-China relations  
中美关系事关"两个秩序" 

 

Summary: In the lead up to Xi Jinping's state visit to the U.S. in September, and in the wake of the most recent (and lackluster) U.S.-China Strategic and Economic Dialogue, there is a great deal of discussion about the future course of U.S.-China relations. Here Wang Jisi, the dean of the School of International Studies at Peking University, describes what China sees as the petulant basic position of the U.S. vis-à-vis China's rise.

 

Excerpt from the story: "It's undeniable that the U.S. has used multiple means to try to influence the course of China's economic opening and political development. When we investigate the motive for this, we see that, ideologically speaking, it's based on the belief that if China undertakes 'political reform' that the U.S. hopes for, China can better integrate into the global system that was designed and defended by the U.S. Recently, the U.S. has become concerned that an increasingly powerful China will toss aside the global order and 'set up its own kitchen' (另起炉灶), thus squeezing it out of Asia. In other words, only if Washington is convinced that China has no long-term plan to overthrow the position of the US as the global hegemony will the U.S. allow for China's national strength to grow."

 

Source: Financial Times Chinese edition

China Talk: Interviews, Lectures and Events
The sustainability of debt in China 
At a recent conference organized by University of Southern California's U.S.-China Institute, Victor Shih discussed the perils of China's accumulation of local debt. Click here to view the video.

 

21st Century China Program
School of Global Policy and Strategy
(formerly School of International Relations and Pacific Studies)

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