China's problem isn't its markets

An investor watches stock prices in Anhui province. Photo: Zuma Press 

There are many good reasons to be spooked about economic stability in China—but the performance of its markets isn’t one of them.

Amid a global panic about the Chinese stock-market collapse, it’s worth noting that the Shanghai A-share index is still up by 23% since the start of its wild bull run in November last year. Not all punters have lost their shirts; even if they had, the 50 million or so active individual investors in China account for just 4% of the country’s population.

A similar case can be made for the Chinese currency. On the charts, the yuan’s 2.5% drop against the dollar since Beijing moved to devalue it is a blip. Compare that with the Japanese yen’s almost 60% decline since its peak in 2012. “Now that is a devaluation,” writes Ken Courtis, a Tokyo-based economist and former vice chairman of Goldman Sachs Asia. In fact, the yuan remains a stellar performer compared with almost every other currency in the world.

The real-estate market? There’s massive overbuilding, to be sure. But that hasn’t led to a collapse as some China bears were predicting. Prices are actually rising in major cities like Shanghai and Beijing. Elsewhere, as the government relaxes rules on mortgage lending, buyers are coming back. That suggests there may be less slack in the market than pessimists think.

Of course, things could get much uglier if investors start losing faith in the government.

And that’s the larger concern. So far, the government’s handling of the markets has been marked by heavy-handedness, confusion and—to the dismay of the investing world outside China—incoherence. All this risks provoking the very crisis of confidence that officials are trying to avoid.

Consider the case of Wang Xiaolu, a reporter for the respected financial magazine Caijing, who is now languishing in detention over a story he wrote back in July that said authorities planned to scale back their intervention to prop up the stock market. That’s exactly what happened. But the scoop precipitated a sharp fall in the market—and angered the regulators. State TV aired a “confession” in which a haggard-looking Mr. Wang said he had inflicted “huge losses on the country and investors.”

A full-scale witch hunt is under way to find other culprits to blame for wrecking the market. State media report a wave of police investigations into “malicious short sellers” and “rumor mongers.”

Meanwhile, international investors are still trying to figure out why the government engineered the mini-devaluation in August.

Officially, it was part of a switch in the trading regime to make the yuan’s exchange rate more market-oriented. Yet central-bank intervention to control the rate continues as before. The absence of a better explanation has fueled speculation that the move was really a desperate bid to boost exports—China’s first shot in a global “currency war.”

“I can’t get a straight story,” complains a strategist with one of the world’s largest hedge funds. Wall Street sees the uncertainty as yet another reason to bet against China.

Clumsiness is out of character for a government that has confidently worked through every economic crisis it has faced during the past three decades, including the 2008 global financial meltdown.

But this is different. There are no easy fixes for an economy growing at its slowest rate in a quarter of a century, burdened by debt, swamped in industrial overcapacity and in the throes of an economic transition that Premier Li Keqiang admitted just last week at the World Economic Forum would be “painful and treacherous.”

The government appears vulnerable: Its political legitimacy is on the line. Lacking some of the basic skills needed to reassure investors—not least the ability to deliver clear, timely and accurate information—it’s falling back on the same harsh measures it’s been employing against other groups it finds difficult to control, like NGOs and religious organizations.

We’re witnessing a top-down regime struggling with market sentiment bubbling up. In an interconnected world, the turmoil is rippling across China’s borders. The Communist Party’s credibility problem is now Wall Street’s.

And money is fleeing the country. Among foreign investors, the most closely watched number in China today is not the Shanghai stock market index, or the exchange rate, or the price per square meter of a Shanghai apartment. It is the figure for capital outflows reflected in the decline of the country’s foreign-exchange reserves.

They’re still massive but they’re dwindling fast. The reserves fell by a record $93.9 billion in August. If that’s a proxy for confidence in the government—which many believe to be the case—repression isn’t helping.

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