Chinese Howevers (2)

The Chinese economy faces a lack of internal demand. When the current growth phase began, everyone in China was poor. For many years, it relied on growing demand for its exports, but since the GFC that growth has faltered.

The Chinese government is now encouraging its middle classes to get into the share market, so the regular income and wealth effects will encourage consumption increasing the demand for production.

However, the share market fall will shake confidence and act as a break on consumer demand.

Government Action
President Xi and his technocrats believed that high stock values would allow highly indebted companies to sell shares at a high price and use the proceeds to pay off debt at a low cast.

The government is taking actions to prop up the market. The People’s Daily claimed, "We have the conditions, the ability and the confidence to preserve stockmarket stability”. Interest rates have been cut. Central-bank funded share-buying schemes have been implemented. Initial Public Offerings have been cancelled. Short selling has been limited. Rules for pension funds and the social security funds have been changed to allow more investment in stocks.

State-owned companies and controlling shareholders have been ordered not to sell their shares. Rules changed so investors can use their houses as collateral to borrow money to buy stocks. A state-owned securities financing company has lent $42 billion brokerages so they could purchase blue-chip shares.

Trading in 90% of share has been suspended, either at the request of the companies themselves, or compulsorily because prices fell more than 10% in a day.

The actions have had an effect, as share prices have rallied.

However, government attempts to stand against the tide of the market usually fail in the long term.

Economic Growth
The growth of the Chinese economy has been slowing over the last couple of years.

However, China still has enormous potential further growth.

The government channelled production in to infrastructure but that is no longer so effective. China does not need anymore “ghost cities”. A “One Belt, One Road” initiative is encouraging infrastructure to connect China with the Middle East, and hence to Africa and Europe.

However, whereas companies in the US and Europe rely on equity funding, Chinese companies have expanded using bank debt rather than equity. This means that the share market is far less important than in the West. This means that the impact on the real economy will be much less. The share market crash is unlikely to trigger a major depression in China.

However, the Chinese economy is a state controlled economy. History shows that governments are not clever enough to fully control their economy. The Soviet Union collapsed when the economic contradictions got to great. China has the same contradictions, so it will eventually fall apart too.

China has a debt-based economy. Total debt is $30 trillion. Government debt is equivalent to 300% of annual GDP. It make take a long time, but this will eventually catch up on it.