China has created a monster it can't control
By Jeremy Warner
3 Sep 2015
When in trouble, shoot the messenger. This timehonoured
approach to dealing with unwelcome news was
much in evidence in China this week when nearly 200 people
were rounded up and criminally charged with spreading
“false" rumours about the stock market and the economy, or
otherwise profiting from their travails.
One luckless financial journalist was ritually paraded
on state TV, tearfully confessing his “crimes". Meanwhile,
the head of the Chinese desk of one London-based hedge
fund group was summoned to a “meeting" with regulators,
and hasn't been heard of since. Her Chinese husband says
“she's gone on holiday". We can only hope it is not to the
re-indoctrination of the asbestos mines. Despite the massive
progress of recent decades, old habits die hard.
China was meant to have embraced free market reform,
yet these latest actions suggest an altogether different
approach. Roughly summarised, it amounts to: “Reform good,
but woe betide the free market if it doesn't do what the high
command wants it to." When the stock market was going up,
the Chinese authorities were perfectly happy to tolerate what,
to virtually all Western observers, looked like a dangerously
speculative bubble, vaingloriously believing it to be a fair
reflection of the wondrous successes of the Chinese economy.
The first rule of stock market investment – that share
prices can go down as well as up – seems to have been almost
wholly forgotten in the scramble for instant riches. When,
inevitably, the stock market crashed, the authorities threw the
kitchen sink at the problem, but they failed to halt the carnage.
This was an even ruder awakening – for it demonstrated to an
already disillusioned public that policy-makers were no longer
in control of events. Perhaps they hadn't noticed, but there
are today more Chinese with stock trading accounts – some
90 million – than there are members of the Communist Party –
“just" 80 million. In any case, powerless before the storm, the
authorities have instead turned to scapegoating.
Apparently more liberal, advanced economies, it ought to
be said, are by no means averse to this kind of behaviour
either. A few years back, Italian prosecutors charged nine
employees of Standard & Poor's and Fitch Rating with
market abuse for daring to downgrade Italy's credit rating,
while it is still commonplace in France to blame Anglo-Saxon
speculators and their cronies in the London press for any
financial or economic setback.
Nor are Western governments and central bankers
averse to a little market manipulation when it suits them. What
is “quantitative easing" other than money printing to prop up
asset prices, including stocks and shares? Chinese refusal to
accept the judgments of “Mr Market", it might be argued, is
just a more extreme version of the same thing. Small wonder
that European officials sometimes look longingly across at the
state-directed capitalism practised in China, and pronounce it
a model we might perhaps aspire to ourselves.
As recent events have demonstrated, we should not.
China's stock market crash is not the work of malicious
financial journalists and short-selling hedge funds, but a signal
of difficult time ahead and perhaps even of an economic roadcrash
to come. After nearly 35 years of spectacular progress,
the Chinese economy faces multiple challenges on many
fronts which are not going to be solved by denying harsh
realities and imprisoning journalists.
The progress of recent decades belies an industrial sector
which in truth has become quite seriously uncompetitive
by international standards. Many of China's factories need
completely retooling to keep up with developments in robotics
and other forms of mechanisation. Yet if industry is to get less
labour intensive, this only further steepens the challenge of
employment creation.
It is reckoned that China needs to create some 20 million
jobs a year just to keep pace with employment demand as
the population shifts from land to town, eight million of them
in high-end professions to cater for the country's burgeoning
output of graduates. China's modernisation has created a
monster which it is struggling to feed.
As the export-growth story waned, China compensated
by unleashing a massive investment boom, which internal
demand is now struggling to keep up with, rendering many
of the country's shiny new constructs uneconomic and
overburdened with bad debts.
The Chinese leadership looks to growth in consumption
and service industries to plug the gap, but these new sources
of demand can't do so without further free-market reform,
which in turn requires further loosening of the shackles of
political control. Without growth, the Communist Party loses
its political legitimacy, yet the old growth model is broken,
and to achieve a new one, the authorities must cede the very
power and influence that sustains them. Rumour-mongering
journalists and short-selling speculators can only be blamed
for so long.
(http://www.telegraph.co.uk. Adapted)
The seventh paragraph begins with the statement – As recent
events have demonstrated, we should not. – which points out
to the opinion of the author, meaning that he
