Why China’s stock market bubble was always bound to burst
According to one widely cited survey of these new investors, 67% of them have less than a high-school education.
.. The fact that Chinese stocks were climbing ever higher while the Chinese economy was cooling should have been an unmistakable warning of a bubble, but it caused surprisingly little concern. (Another reason to worry might have been the disparity in prices between so-called “A-shares”, which can only be purchased by investors inside China to keep the domestic market shielded from outside foreign manipulation, and stakes in the same companies available to foreign investors through the Hong Kong exchange, known as “H-Shares”. This disparity suggested Chinese investors were bidding up prices well beyond any reasonable approximation of their value.)
.. Steadily rising prices seemed to be delivering on both Deng Xiaoping’s promise of “a relatively well-off society” (xiaokang shehui) and the current president Xi Jinping’s rhetoric of a full-blown “Chinese dream” (zhongguo meng) – a fuzzy notion that promises wealth, wellbeing, and power to individuals and the nation as a whole.
.. Instead of dedicating its energy to regulating the markets, the Chinese Communist party began to see an unprecedented opportunity in further inflating the bubble – a chance to sell equity stakes in dangerously debt-burdened state enterprises and help clean up some very messy balance sheets. If the planting of two stock markets on soil long ploughed by Maoist sloganeering about “capitalist roaders” was a mild surprise, it was mind-bending to witness the party embrace the bull market so ardently that even its official voice, the People’s Daily, began to flog stocks as a golden risk-free opportunity.
.. And so the bubble grew and grew: price-to-earnings ratios for Chinese stocks averaged an astounding 70-to-1, against a worldwide average of 18.5 to 1; the value of the A-shares inside China grew to be nearly double the equivalent shares of the same companies on the Hong Kong exchange.
.. It was a prescient warning, given what followed. But almost immediately after the report appeared, the chapter containing these cautions suddenly vanished: unspecified Chinese officials had taken umbrage at such direct criticism, and forced the World Bank to redact the offending portion of its analysis
.. To reassure “the people” that the government had not turned bearish on the foundering markets, the People’s Daily again rhapsodised about the glories of investment over “the long term”: “It is after storms that we encounter rainbows,” it wrote. “Looking back at the development of China’s capital market, we realise that the road to development has not always been smooth, but has instead been a twisting one with ups and downs. But it is in each lesson learned that the market has matured … So participants in the market should earnestly reflect, collectively sum up their experiences, and then work together to achieve a capital market that is stable and can continue to develop in a healthy manner over the long term.”
.. But although they were still up 82% over a year ago, they had fallen 28% from their high in June – and this week, they began dipping once again. Furthermore, some half of all listed companies – representing 40% of the market’s total value – had suspended trading, creating a gross market distortion, augmented by the fact most “buyers” in the market were now government-funded surrogates ordered to do so, not value-conscious investors.
.. By acting so intrusively, party leaders have left themselves subject to what Colin Powell memorably called the “Pottery Barn rule” – if you break it, you own it. Suddenly, China’s stock exchanges have become wards of the Chinese Communist party ..
.. By introducing so many conflicting ideas and institutions from different systems into the heart of what was still the Chinese communist revolution, Deng Xiaoping became the progenitor of what ended up being a virtual counter-revolution against Maoism. And while his “reform and opening up” did infuse his country with significant new dynamism, it also put a series of troublesome institutional and ideological contradictions at the centre of China’s whole post-Mao landscape.Stock markets were only one of the most obvious and graphic examples of these contradictions.
.. This is an ancient notion, dating back to imperial times, when an emperor’s reign was believed to be legitimised by a so-called “mandate of heaven,” (tianming), that conferred the right on a sovereign to rule. Any untoward sign of heaven’s disfavour, it was believed, would be manifested through such things as earthquakes, rebellions, droughts or other disturbances in the usual order of things. And since such events were invariably viewed as ominous end-of-dynasty symbols, emperors were always strongly allergic to them