China’s support of the stock markets smacks of sheer panic.
Premier Li Keqiang held a series of hurried meetings with more than 20 of the top securities firms and the financial regulators on Sunday, clearly struggling with a response to a market that has fallen 30 percent in the past few weeks. The funds were encouraged to provide Rmb120 billion into the markets. Meanwhile, the central bank said it would provide liquidity to a special margin financing company, China Securities Finance Corp., further encouraging a spate of stock lending.
These policies are likely to be ineffective at stopping the market’s rout. They also are another sign of frantic policy making among a leadership without a clear plan.
One of the biggest economic problems is exploding debt held by towns across China. Just a month ago, the central bank issued a bold plan to turn Rmb2 trillion of local debt into market-traded bonds. It was a clever attempt to fashion a sophisticated market solution to a government led debt boom. But over the space of just a few weeks, the policy devolved into a free-for-all as different factions fought over the details. First, the banks refused to buy the bonds because the interest rates were too low. Then, the central bank quietly cut a deal, allowing them to use the bonds as collateral for central bank loans, ending hopes of a market solution.
Finally, it became clear that the goal of halting the rise in bad loans to wasteful local projects was too risky. So the State Council said the banks could lend to these projects “if they needed loans to continue.”
The State just can’t keep its hands off the economy.
There is widespread disappointment that President Xi is failing to live up to the progressive economic reforms heralded in the Party’s 3rd Plenum in 2013. Those reforms could go a long way toward putting capital to work in the vibrant small business sector, which is the biggest employer. Misallocation of capital is arguably China’s biggest economic problem.
But reforms such as interest rate liberalization and more market lending would take the country’s capital out of the hands of the state banks, which control 50% of all loans. And these banks are at the center of China’s economy.
The problem is, after a decade-long economic boom that has seen debt rise to 280 percent of GDP, economic growth is slowing, and the leadership is running out of options. Instead of reforming the economy, it is doing what it knows best – spending state money. It is turning to the last remaining pools of capital as a way to keep GDP within reasonable bounds. Insurance companies have become the largest investors in the country’s infrastructure projects. The state owned policy banks, such as the China Development Bank, are investing billions in the property market.
Now, with the stock collapse this week, we’re seeing the central bank step in to help the markets – a role no central bank should play.
This all suggests policy disagreements at the top. There are rumors within Beijing of a conflict between the head of the People’s Bank of China and the China Securities Regulatory Commission, who reportedly wanted the central bank job. Meanwhile, it looks like President Xi Jinping is trying to keep his hands out of the difficult issues of economic policy – even though he leads the Finance and Economics Leadership Small Group, the key policy committee. It was Premier Li Keqiang who reportedly took the reigns on the stock market bailout by leading the key meetings over the weekend.
Even the World Bank noted in a recent report that, “instead of promoting the foundations for sound financial development, the state has interfered extensively and directly in allocating resources.”
There are no doubt great ideas bubbling through the think tanks and policy organs in Beijing. There are very knowledgeable academics at institutions like the Central University of Finance and Economics, which has some of the best data on areas like the opaque Shadow Banking market. But in the end, in China, control is what matters. The State likes to keep its hand firmly on the rudder.