China's Next Economy
Chinese Markets Stabilize

The Chinese markets have regained their footing, the Financial Times reported this morning, with the blue-chip index CSI-300, which had dropped 7 percent yesterday, closing up 0.3 percent on the day. Analysts think Beijing’s “national team” of SEOs may go on another massive stock buying spree, despite a November pledge by authorities that they would not do so again. Additionally, the People’s Bank of China yesterday pumped $19.9 billion into the financial system using open market operations, allaying what some analysts saw as market worries about liquidity. Finally, Beijing seemed to indicate that a ban on large shareholders selling their stakes, first imposed in July but set to be lifted on Friday, may be extended.

In an interview with Foreign Policy, Yukon Huang, a Senior Fellow at the Carnegie Endowment, said yesterday’s market slide doesn’t reflect the fundamentals of the Chinese economy:

China’s stock market has never mirrored developments in its real economy. Until 2014, the indices did not rise despite a near doubling in the size of the economy since 2007. Expectations shifted only when traders were persuaded that the government wanted equity prices to rise in mid-2014. The market is still suffering from the mistakes made since then in talking up market expectations to unrealistic levels which then led to last summer’s crash. The subsequent recovery over the past several months level has continued to be supported artificially by government actions. Now that some of the restrictions on selling are lapsing, speculators are cashing in on the recent market rebound.

That’s a concise and compelling summary of the situation. But even if Huang is right, it remains the case that China’s growth has slowed—and looks poised to slow even more this year. In an interview with Politico, economist Tyler Cowen postulates that China’s GDP growth is around 3–5 percent right now, and may slow to zero this year. So while yesterday’s market fall may not itself suggest much about the real economy, that doesn’t mean the real economy—which is undergoing an important, but painful transition from heavy industry to services—is going gangbusters.

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