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claimed “the dynamism of the market” would be harnessed to move China towards a new economic paradigm, replacing its outdated reliance on the cheap labour, cheap credit and booming export markets that have fuelled growth for the past 37 years.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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Europe’s last Blairite: Can Manuel Valls win the French presidency?

He first made a name for himself protesting against halal supermarkets. Now, he could be the man to take down François Hollande.

The election of François Hollande as the president of France in 2012 coincided with the high-water mark of Ed Miliband’s leadership of the Labour Party. That year, Labour posted its best local election results in 17 years, gaining 823 councillors and winning control of 32 councils in a performance that has not yet been surpassed or equalled.

Gazing across the Channel, the Milibandites were given hope. Hollande showed that a wonkish career politician could triumph over a charismatic centre-right incumbent.

The UK’s shattered Blairites looked to a different star rising in French politics: Manuel Valls. At the time of Hollande’s victory, Valls was the mayor of Évry, a small suburb of Paris, where he made a name for himself by campaigning against halal supermarkets.

His father, Xavier, was a Spanish painter and his mother, Luisangela, was Swiss-Italian. They met and married in Paris, and Valls was born in Barcelona while the couple were on holiday.

In 2009 Valls urged the Parti Socialiste (PS) to drop the adjective “socialist” from its name, and he ran for the presidential nomination two years later on what he described as a Blairiste platform. This included scrapping the 35-hour working week, which hardly applies outside of big business and the public sector but carries symbolic weight for the French left. Valls’s programme found few supporters and he came fifth in a field of six, with just 6 per cent of the vote.

Yet this was enough to earn him the post of interior minister under Hollande. While Valls’s boss quickly fell from favour – within six months Hollande’s approval ratings had dropped to 36 per cent, thanks to a budget that combined tax rises with deep spending cuts – his own popularity soared.

He may have run as an heir to Blair but his popularity in France benefited from a series of remarks that were closer in tone to Ukip’s Nigel Farage. When he said that most Romany gypsies should be sent “back to the borders”, he was condemned by both his activists and Amnesty International. Yet it also boosted his approval ratings.

One of the facets of French politics that reliably confuse outsiders is how anti-Islamic sentiment is common across the left-right divide. Direct comparisons with the ideological terrain of Westminster politics are often unhelpful. For instance, Valls supported the attempt to ban the burkini, saying in August, “Marianne [the French symbol] has a naked breast because she is feeding the people! She is not veiled, because she is free! That is the republic!”

By the spring of 2014, he was still frequently topping the charts – at least in terms of personal appeal. A survey for French Elle found that 20 per cent of women would like to have “a torrid affair” with the lantern-jawed minister, something that pleased his second wife, Anne Gravoin, who pronounced herself “delighted” with the poll. (She married Valls in 2010. He also has four children by his first wife, Nathalie Soulié.)

Yet it was a chilly time for the French left, which was sharply repudiated in municipal elections, losing 155 towns. Hollande sacked his incumbent prime minister, Jean-Marc Ayrault, and appointed Valls in his place. He hoped, perhaps, that some of Valls’s popularity would rub off on to him.

And perhaps Valls, a student of “Third Way” politics, hoped that he could emulate the success of Bill Clinton, who turned sharply to the right following Democratic losses in the US 1994 midterm elections and won a great victory in 1996. Under Valls’s premiership, Hollande’s administration swung right, implementing tough policies on law and order and pursuing supply-side reforms in an attempt to revive the French economy. Neither the economic recovery, nor the great victory, emerged.

With the date of the next presidential election set for 2017, Hollande was in trouble. His approval ratings were terrible and he faced a challenge from his former minister Arnaud Montebourg, who resigned from the government over its rightward turn in 2014.

Then, on 27 November, Prime Minister Valls suggested in an interview that he would challenge the incumbent president in the PS primary. After this, Hollande knew that his chances of victory were almost non-existent.

On 1 December, Hollande became the first incumbent French president ever to announce that he would not run for a second term, leaving Valls free to announce his bid. He duly stood down as prime minister on 5 December.

Under the French system, unless a single candidate can secure more than half of the vote in the first round of the presidential election, the top two candidates face a run-off. The current polls rate Marine Le Pen of the Front National as the favourite to win the first round, but she is expected to lose the second.

Few expect a PS candidate to make the run-off. So Hollande’s decision to drop out of his party’s primary turns that contest into an internal struggle for dominance rather than a choice of potential leader for France. The deeper question is: who will rebuild the party from the wreckage?

So although Valls has the highest international profile of the left’s candidates, no one should rule out a repeat of his crushing defeat in 2011.

He once hoped to strike a Blairite bargain with the left: victory in exchange for heresy. Because of the wasting effect of his years in Hollande’s government, however, he now offers only heresy. It would not be a surprise if the Socialists preferred the purity of Arnaud Montebourg. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

This article first appeared in the 08 December 2016 issue of the New Statesman, Brexit to Trump