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claimed “the dynamism of the market” would be harnessed to move China towards a new economic paradigm, replacing its outdated reliance on the cheap labour, cheap credit and booming export markets that have fuelled growth for the past 37 years.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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Our union backed Brexit, but that doesn't mean scrapping freedom of movement

We can only improve the lives of our members, like those planning stike action at McDonalds, through solidarity.

The campaign to defend and extend free movement – highlighted by the launch of the Labour Campaign for Free Movement this month – is being seen in some circles as a back door strategy to re-run the EU referendum. If that was truly the case, then I don't think Unions like mine (the BFAWU) would be involved, especially as we campaigned to leave the EU ourselves.

In stark contrast to the rhetoric used by many sections of the Leave campaign, our argument wasn’t driven by fear and paranoia about migrant workers. A good number of the BFAWU’s membership is made up of workers not just from the EU, but from all corners of the world. They make a positive contribution to the industry that we represent. These people make a far larger and important contribution to our society and our communities than the wealthy Brexiteers, who sought to do nothing other than de-humanise them, cheered along by a rabid, right-wing press. 

Those who are calling for end to freedom of movement fail to realise that it’s people, rather than land and borders that makes the world we live in. Division works only in the interest of those that want to hold power, control, influence and wealth. Unfortunately, despite a rich history in terms of where division leads us, a good chunk of the UK population still falls for it. We believe that those who live and work here or in other countries should have their skills recognised and enjoy the same rights as those born in that country, including the democratic right to vote. 

Workers born outside of the UK contribute more than £328 million to the UK economy every day. Our NHS depends on their labour in order to keep it running; the leisure and hospitality industries depend on them in order to function; the food industry (including farming to a degree) is often propped up by their work.

The real architects of our misery and hardship reside in Westminster. It is they who introduced legislation designed to allow bosses to act with impunity and pay poverty wages. The only way we can really improve our lives is not as some would have you believe, by blaming other poor workers from other countries, it is through standing together in solidarity. By organising and combining that we become stronger as our fabulous members are showing through their decision to ballot for strike action in McDonalds.

Our members in McDonalds are both born in the UK and outside the UK, and where the bosses have separated groups of workers by pitting certain nationalities against each other, the workers organised have stood together and fought to win change for all, even organising themed social events to welcome each other in the face of the bosses ‘attempts to create divisions in the workplace.

Our union has held the long term view that we should have a planned economy with an ability to own and control the means of production. Our members saw the EU as a gravy train, working in the interests of wealthy elites and industrial scale tax avoidance. They felt that leaving the EU would give the UK the best opportunity to renationalise our key industries and begin a programme of manufacturing on a scale that would allow us to be self-sufficient and independent while enjoying solid trading relationships with other countries. Obviously, a key component in terms of facilitating this is continued freedom of movement.

Many of our members come from communities that voted to leave the EU. They are a reflection of real life that the movers and shakers in both the Leave and Remain campaigns took for granted. We weren’t surprised by the outcome of the EU referendum; after decades of politicians heaping blame on the EU for everything from the shape of fruit to personal hardship, what else could we possibly expect? However, we cannot allow migrant labour to remain as a political football to give succour to the prejudices of the uninformed. Given the same rights and freedoms as UK citizens, foreign workers have the ability to ensure that the UK actually makes a success of Brexit, one that benefits the many, rather than the few.

Ian Hodon is President of the Bakers and Allied Food Workers Union and founding signatory of the Labour Campaign for Free Movement.