A model of Chongquing built from coins. Photo: STR/AFP/Getty Images
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The wild ride on China’s stock-market rollercoaster is far from over

China's admirers like to compare its Communist leadership to a meritocratic mandarin caste whose governance skills outstrip anything on offer in the west. But with £2trn wiped off the mainland exchanges in July, the picture is more complicated.

The scale and speed of China’s growth make it easy to overlook the way in which the country is still feeling its way forward. It may have become the world’s second-biggest economy, with 7 per cent growth officially reported for the second quarter of the year this past week, but it is still plagued by problems of expansion, from disparities in wealth to a huge environmental fallout. Recent weeks have thrown up another example of the dangers that can arise from insufficiently considered leaps into the future.

Admirers of China like to compare its Communist leadership to a meritocratic mandarin caste whose governance skills outstrip anything on offer from the fumbling administrations of western democracies. Yet the convulsions of the mainland stock markets over the past month – in which £2trn ($3.2trn) was wiped off the mainland exchanges before prices stabilised towards the end of the first week in July – show the authorities in a rather different light.

One might ask why Beijing was so intent on developing the country’s stock markets on the back of individual retail investors, many of them lacking experience in such techniques as margin trading, in which you buy shares using money borrowed from a broker. It might have been better from the start to have mobilised big institutional players, such as pension funds. The government, however, decided to encourage the growth of the largely retail markets in Shanghai and Shenzhen, in the hope that companies would raise capital there rather than seeking bank loans.

This was considered to be part of the modernisation of the financial system at the heart of the ambitious reform plan laid out by the Communist Party at the end of 2013. The programme claimed “the dynamism of the market” would be harnessed to move China towards a new economic paradigm, replacing its outdated reliance on the cheap labour, cheap credit and booming export markets that have fuelled growth for the past 37 years. The stock market was viewed as a way of achieving a more efficient allocation of capital and of mobilising household savings into corporate funding.

As it happened, there was a lot of cash looking for a home as a result of the downturn in the property market, historically a magnet for middle-class savings, and a squeeze on high-risk financial products outside the mainstream banking system. On top of that, the relaxation of rules on margin trading acted as an incentive to buy shares.

The result was a runaway bull market from 2014 onwards, with the number of individual investors increasing from 70 million to 90 million and the volume of officially sanctioned margin trading rising from £40bn to £220bn. Once the boom was under way, the government moved in with the second part of its strategy to develop China’s stock markets, introducing measures that facilitated the initial public offerings (IPOs) of 25 companies. Given that prices of newly floated firms often double on the first day of trading, the IPOs are hugely oversubscribed.

There were two snags. The first was that the boom assumed bubble proportions on the back of margin trading. The second was that so much cash was tied up in these IPOs that there was little left over to sustain demand for other shares. For short sellers, who make money by betting that prices will drop, it was a clear signal to act. Once they did and share prices fell, the remorseless logic of margin trading kicked in, with investors forced to sell their shares to repay brokers’ loans. The result was a 32 per cent drop in prices on the Shanghai Composite Index in less than a month.

The government moved in with supportive measures, including buying by state institutions, but these were initially unable to stop the slide. Only after increased support and adjusted margin requirements and with half of the quoted shares suspended did the market find a bottom and start to rise.

The impact of the gyrations can be overstated. Of the 90 million account holders, 30 million are estimated to hold only one or two stocks and to trade infrequently. The size of the stock markets is still quite small compared to the overall economy; the two are usually not co-related, so the broader impact of a downturn is limited. In addition, the Shanghai market is dominated by shares of state-backed companies that are less affected by stock movements than private firms. Even in the depths of the early-July decline, the Shanghai Composite Index was 70 per cent above its level a year earlier. Fears of a firestorm that would cause a crash in China and affect other economies were overblown.

Still, the turbulence that resulted in day-to-day swings up to the permitted limit of 10 per cent is likely to continue in short, sharp bursts. What is more important is the impact on the government’s broader economic policies. These face a great deal of opposition from vested interests that have done well out of the old economy and are facing not merely the challenge of change, but also the unrelenting anti-corruption campaign launched by Xi Jinping. They are likely to seize on events on the exchanges to point to the dangers of relaxing controls in the last major Leninist state on earth. Indeed, conspiracy theories on Chinese websites suggest that they may have been behind the short selling.

That will put the reformers on the back foot. Xi is a leader who ranks the preservation of the Communist Party first; if reform seems to present problems with maintaining authority and ensuring social stability, it will take second berth. That would have long-term effects on China’s evolution and may well be the most important aspect of this summer’s market roller coaster.

Jonathan Fenby’s book “Will China Dominate the 21st Century?” is published by Polity. He tweets as: @JonathanFenby

This article first appeared in the 16 July 2015 issue of the New Statesman, The Motherhood Trap

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I'll vote against bombing Isis - but my conscience is far from clear

Chi Onwurah lays out why she'll be voting against British airstrikes in Syria.

I have spent much of the weekend considering how I will vote on the question of whether the UK should extend airstrikes against Daesh/Isis from Iraq to Syria, seeking out and weighing the evidence and the risks.

My constituents have written, emailed, tweeted, facebooked or stopped me in the street to share their thoughts. Most recognised what a difficult and complex decision it is. When I was selected to be the Labour candidate for Newcastle Central I was asked what I thought would be the hardest part of being an MP.

I said it would be this.

I am not a pacifist, I believe our country is worth defending and our values worth fighting for. But the decision to send British Armed Forces into action is, rightly, a heavy responsibility.

For me it comes down to two key questions. The security of British citizens, and the avoidance of civilian casualties. These are separate operational and moral questions but they are linked in that it is civilian casualties which help fuel the Daesh ideology that we cannot respect and value the lives of those who do not believe as we do. There is also the important question of solidarity with the French in the wake of their grievous and devastating loss; I shall come to that later.

I listened very carefully to the Prime Minister as he set out the case for airstrikes on Thursday and I share his view that Daesh represents a real threat to UK citizens. However he did not convince me that UK airstrikes at this time would materially reduce that threat. The Prime Minister was clear that Daesh cannot be defeated from the air. The situation in Syria is complex and factionalised, with many state and non-state actors who may be enemies of our enemy and yet not our friend. The Prime Minister claimed there were 70,000 ground troops in the moderate Free Syrian Army but many experts dispute that number and the evidence does not convince me that they are in a position to lead an effective ground campaign. Bombs alone will not prevent Daesh obtaining money, arms and more recruits or launching attacks on the UK. The Prime Minister did not set out how we would do that, his was not a plan for security and peace in Syria with airstrikes a necessary support to it, but a plan to bomb Syria, with peace and security cited in support of it. That is not good enough for me.

Daesh are using civilian population as human shields. Syrians in exile speak of the impossibility of targeting the terrorists without hitting innocent bystanders. I fear that bombing Raqqa to eliminate Daesh may be like bombing Gaza to eliminate Hamas – hugely costly in terms of the civilian population and ultimately ineffectual.

Yet the evil that Daesh perpetrate demands a response. President Hollande has called on us to join with French forces. I lived in Paris for three years, I spent time in just about every location that was attacked two weeks ago, I have many friends living in Paris now, I believe the French are our friends and allies and we should stand and act in solidarity with them, and all those who have suffered in Mali, Kenya, Nigeria, Lebanon, Tunisia and around the world.

But there are other ways to act as well as airstrikes. Britain is the only G7 country to meet its international development commitments, we are already one of the biggest humanitarian contributors to stemming the Syrian crisis, we can do more not only in terms of supporting refugees but helping those still in Syria, whether living in fear of Daesh or Assad. We can show the world that our response is to build rather than bomb. The Prime Minister argues that without taking part in the bombing we will not have a place at the table for the reconstruction. I would think our allies would be reluctant to overlook our financial commitment.

We can also do more to cut off Daesh funding, targeting their oil wells, their revenues, their customers and their suppliers. This may not be as immediately satisfying as bombing the terrorists but it is a more effective means of strangling them.

The vast majority of the constituents who contacted me were against airstrikes. I agree with them for the reasons I set out above. I should say that I have had no experience of bullying or attempts at intimidation in reaching this decision, Newcastle Central is too friendly, frank, comradely and Geordie a constituency for that. But some have suggested that I should vote against airstrikes to ensure a “clear conscience” ’. This is not the case. There will be more killings and innocent deaths whether there are UK airstrikes or not, and we will all bear a portion of responsibility for them.

A version of this article was originally sent to Chi Onwurah's constituents, and can be read here