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Chinese Stock Market Declines and their People’s Aspirations for Freedom

2015-07-08

An article in today’s New York Times (NYT) online describes losses in the Chinese stock markets: the main stock index has fallen dramatically in the last month, and the bull market that started a year ago has crashed.  Prices rose from June 2014 to a peak on June 12 of this year and have fallen back, so far, to the levels of January 2015.   One of the smaller exchanges has had a bull market since 2012, but has fallen off just as suddenly as the rest of the market.  The government has instituted aggressive measures to try to stem the selling.

One of the market’s problems is margin buying, the leverage of which enhances booms as well as busts.  Trying to reduce margin buying in China is difficult because some people borrow money on a shadow market which is mostly hidden from the government and charges high interest rates, resembling the loan-sharking business here in the US.

Since the introduction of a relatively free stock market in China, share prices have as much as quintupled in the last five years.  This has been encouraged by the practice of borrowing money to buy on margin.  Now panic selling has gripped the market and each day, a quarter of stocks have trading suspended because their prices have dropped more than ten percent.  Up to half of stocks in the first two days of this week have had their trading suspended.

The government has been aggressively responding to the sell-off, and one of the biggest brokerage houses established a 20 billion dollar stabilization fund this week.  Both banks and brokerage houses are threatened by margin buying, which is estimated to account for $550 billion in stock purchases, although accurate estimates are impossible because of hidden borrowing in the shadow banking sector, for which numbers are unavailable.

One difference from the US and European markets as well as the Japanese market is that the government of China has begun to implement aggressive measures, and is likely to be much more aggressive than other governments in trying to prevent a serious crash that could cost many people their life savings and destabilize the society.  China’s government is obsessed with the country’s stability and will do anything to prevent discontent that could lead to protests and uncooperative behavior.  China has a long past history of unstable, weak governments and disastrous public discontent, from walking off the job to rioting to mass migrations, resulting in famines and revolutions, and its leaders are fully aware of the consequences of loss of control.

So, unlike the government inaction that followed the stock market crash of 1929, it is likely that the Chinese government will take concerted, prolonged action to prevent the negative consequences of its experiment with free-market ideas like stocks and bank loans.  Weak consumer demand and a slumping economy, while still rapidly expanding by world standards, has already resulted in government responses and is likely to lead to more if initial reactions do not have the desired effect.

The apparent trade-off that the Chinese government has made has been, and continues to be, is to obtain stability at the cost of individual freedoms and the development of an upper class that has all the power and most of the money.  All levels of government are highly secretive and have been controlled by a small, insular group.  Recent pronouncements by government figures show that the plan continues to be to maintain an oligarchy and to do everything possible to control public opinion through censorship and imprisonment of dissenters.  Low-level dissent is punished by harassment from secret police, who can do anything they deem necessary to discourage individuals from expressing disagreement with government policies.  Potentially disturbing news is quickly suppressed; censorship of electronic and print media is pervasive.  Those who are trying to live within the government’s limits have learned self-censorship for survival’s sake, but upward mobility is limited by the need to have personal connections to obtain permission to undertake projects that have profit-making potential.

China has, since the accession of Chairman Mao, had an obsession with stability and growth.  Mao’s disastrous personal projects such as the Cultural Revolution have been abandoned by his successors, sacrificed to the all-consuming need for stability to attain food and personal comforts for all the population.  The Chinese public is willing to tolerate authoritarian rule to achieve personal sufficiency and even personal luxury, like a car for every family.

Once the people have achieved a sense of personal adequacy and are no longer haunted by the memories of starvation, still echoing since the 1930’s through the 1950’s and even into the 1960’s, they may develop additional aspirations that are familiar to us, such as a desire to speak out and to be informed objectively.  The Chinese may even find a taste for real democracy and a disgust for plutocracy and the US practice of paying lip service to free speech while quietly but brutally suppressing genuine dissenters like the Occupy Wall Street crowd.

In the meantime, the Chinese government is a powerful competitor to the US government and may even be considered an enemy of sorts.  Certainly, the actions of Chinese government hackers who stole all of the personal information for all of the US government’s confidential workforce after stealing huge quantities of industrial secrets, are unfriendly to the US and could be used to damage our economy.

It is essential that US government negotiators try to obtain concessions from the Chinese, after taking steps to reassure them that we do not intend to take military action to upset the balance of power in Asia.  The Chinese government is anxious to be seen as a world power, equal to the US if not superior in manpower and armaments.  The US is still the most armed country in the world and spends more on its military than most all other countries combined, but China is number two and is trying harder.

 

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