- - Tuesday, July 28, 2015


Three weeks ago shares on the Shanghai stock market fell by nearly a third in value, wiping out $3 trillion in profits. When the cavalry arrived, the Communist Party leaders threw everything they had to stop the hemorrhaging. Capitalism is particularly precious to Communists.

The nomenclature is similar but the function of the Shanghai market is not what stock markets are to economies in the West and in Japan. Like the rest of the remarkable development of China over the last two decades, the stock market was built from top down. Rather than represent the accumulation of capital from private investors for the growth of companies, it actually represents an indirect function of government credit with a large group of gamblers — 90 million more than members of the Communist Party — along for the ride.

When some smart operators decided they knew how to manipulate the market, they tipped the crash, and the rulers in Beijing dived in to shore it up. They had no choice, because the market had become a showpiece, whatever its real nature. With overall growth of the economy stalling, the usual propaganda was stalling, too, and that couldn’t be tolerated.

The rescue operation was extensive and intensive: a third of the stocks were taken off the market. The central bank went shopping in the market. A state pension fund bought shares for the first time. The government told investors holding more than 50 percent of a company’s shares they couldn’t sell their shares for six months. Brokerage firms were told by the government banks to hold on to inventories.

That looked like it might save the day, but less than a month later the market plunged again, snuffing the rally the government had created. Perhaps leaks that the withdrawal of the extraordinary supports killed the rally. There’s general agreement the present arrangements can’t continue indefinitely.

The significance of the second collapse may be less economic than political. If true, that pulling out the government stops can’t “save” the stock market, what can the government do now? Furthermore, the swift slowdown of economic activity, as seen by some analysts, is less significant than how quickly everything slowed down.

Dropping from the record double digit expansion over the last two decades, the GDP rate of growth officially fell to 7 percent in the first quarter of this year. Some observers think the government cooked the numbers and the GDP numbers were actually worse. When the government came up with the surprising figure of a 7.6 percent growth in the second quarter, some called it “unexpected.” Others called it a lie.

One major investment counseling firm has warned its clients to “China-proof” their portfolios. Most cling to the notion that the Communist government can still prevent “a hard landing” of the economy, the Shanghai crash to the contrary notwithstanding. Comparisons to markets in New York, London, Frankfurt and Tokyo are misleading.

But demand for raw materials has already had an effect on the worldwide commodities market, contributing to the decline in oil and natural gas prices. Optimistic talk sounds more and more like wishful thinking. The cutback in growth has already taken its toll on some speculators — in copper, for example — and has had an effect on such major raw materials exporters as Australia.

The world can’t “China-proof” its own economies. The optimists in the Obama administration must start thinking hard about what would happen if the Chinese economy continues to curdle and crash.

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