by Paramjeet Berwal
China, though governed by the Communist Party of China, is just like any other country that allows operation of markets in an ostensibly free manner. In fact, according to an academic paper written very recently by Prof. Jennifer N. Carpenter and others at the Stern School of Business at New York University, Chinese stock market function as efficiently as any other equity market in the advanced economies, while playing a crucial role in capital allocation. However, when the stock markets fall, the government authorities rush in to save it. This is the cost that a country pays for heavy dependence on a financialised economy. China’s securities exchange has been witnessing a sharp fall this year. As it happens everywhere else, to keep the market sentiments high up, the State plans to usher in short-term oriented measures to stabilise the market and economy at the expense of long-term sustainability.
What the Chinese state has been upto
Today, on October 19, the official state-run press agency, Xinhua News Agency, declared that China’s GDP grew 6.7% in the first three quarters of 2018. International news agencies like Reuters have pointed out that this is perhaps the slowest growth for the country since 2009. Recently, the country further cut, for the fourth time in 2018, its RRR by 1%, thereby increasing liquidity in the market. Though Xinhuanet claims that the main reason for the cut is to boost the real economy, stabilisation of growth, and fulfill market expectations, the authorities have practically no control over how the increase in money flow plays out.
On Friday, October 19, as reported by Xinhuanet, the China Banking and Insurance Regulatory Commission (CBRIC), while undermining and acknowledging the recent fall in financial markets announced the introduction of reforms in order “to stabilize the employment, the financial sector, foreign trade, foreign and domestic investments, and expectations”. The Commission is concerned about the stock-pledged borrowing which is also a cause for liquidation problem in the country.
The announcement from CBRIC coincides with the People’s Bank of China’s stance, as reported by Xinhuanet, that the bank “will maintain liquidity at a reasonable, stable level to promote healthy and stable development of the market and foster a sound economic and financial environment”. After the announcements by the Chinese regulators, reports from Reuters and CNBC announced that the Chinese stock exchange was performing comparatively better.
The Guardian, in July 2015, reported the Chinese banks’ £134bn lending to save the Chinese stock market from collapse. It did not help. Today, the country’s Central Bank seeks to do something on the similar lines, in principle. In order to take care of falling liquidity, as stocks worth USD 648.6 billion have been pledged for procuring finance, reports South China Morning Post, the Central Bank is easing the lending for private businesses. The measure is to ward off the concerns regarding expectations and sentiments of investors, the SCMP reports governor of the bank acknowledging.
In view of the aforementioned, it seems that China, like other countries, is recklessly trying to avoid the stock market collapse by resorting to measures that will further worsen the situation. Not long ago, in September 2017, Reuters reported, China published draft rules for curbing use of stocks as collaterals for borrowing loans. But the contemporary ground reality seems to indicate the otherwise. Increasing liquidity in the market without regulating what it is essentially directed towards, might not afford anything more than temporarily avoiding the collapse of the financial sector. Whether the measures will sustain the fundamentals of the Chinese financial economy which are asserted to be very strong by the national authorities is still to be seen. Considering the nature of measures taken, the same seems very unlikely. Again, how long will such measures sustain?
Paramjeet Berwal is a lawyer and an invited lecturer at the University of Georgia.
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