Is China on the path to economic destruction?

A few weeks ago, at the height of the panic in the Chinese stock markets, a sour joke was doing the rounds: “Last month, the dog was eating what I eat. Last week, I was eating what the dog eats. This week, I think I’ll eat the dog.” A lot of people have lost a lot of money.

A few weeks ago, at the height of the panic in the Chinese stock markets, a sour joke was doing the rounds: “Last month, the dog was eating what I eat. Last week, I was eating what the dog eats. This week, I think I’ll eat the dog.” A lot of people have lost a lot of money.

The Chinese government is permanently terrified. It is terrified of climate change, of slowing economic growth, even of a fall in the stock market — of anything that might cause the population to turn decisively against it.

When you are running a 66-year-old dictatorship, and your only remaining credibility in the public’s eyes is your ability to keep living standards rising, any kind of change is frightening.

How terrified is it? Consider its reaction to the recent sharp fall in the two main Chinese stock markets. China has a capitalist economy, albeit a highly distorted one, and stock markets are a normal part of such economies. They go up, they go down, and normally governments do not intervene in the process.

The Chinese stock markets have recently been on a roller-coaster ride. After treading water for years, prices exploded in June 2014. Over the next year, there was a 150 per cent average rise in prices on the Shanghai Composite exchange, and almost 200 per cent on the Shenzhen. Obviously this was not sustainable, especially since growth in the real economy has been falling for years. A “correction” was inevitable.

It came with a bang, on June 12 of this year. Since then prices have fallen 30 per cent on the Shanghai market, 40 per cent on the Shenzhen. Around $4 trillion in paper values have been wiped out.

But so what? Chinese stock prices are still far higher than they were a year ago. Indeed, at an average of 20 times earnings they are still overvalued by real-world standards.

Why would any government intervene over this? Some investors will win, some will lose and it will all work itself out.

But the Chinese government intervened in a very big way. First it cut interest rates to the lowest level ever. When that didn’t stop the slide in prices, it banned large investors (holding more than five per cent of a listed company’s shares) and all foreign investors from selling their shares for six months.

It encouraged around 1,300 Chinese companies — half the stock market — to suspend trading in their stocks. It forbade any new listings (IPOs) on the markets. It even ordered a state-backed finance company to make new loans to people who want to make bigger bets on the stock market than they can afford.

Anything and everything to stop the prices from falling, and lo! They did stop. Last week, prices even rose a bit.

This may just be what traders call a “dead cat bounce” — if the price falls from high enough, there is bound to be a little bit of a bounce at the bottom — but that is mainly of interest to Chinese investors.

The interesting question for the rest of us is: why did the Chinese communist regime do all this?

Because there are 90 million private investors in the Chinese stock markets. They tend to be older (two-thirds of them didn’t finish high school), they have been betting their savings on the market — and according to state media they have lost, on average, 420,000 yuan ($67,000) in the past six weeks.

That would be no problem if you were already in the market a year ago: you would still be well into the black. But a great many of the private investors piled in very late in the game — 12 million new accounts were opened as recently as May — and they have already lost their shirts. They would have lost their skirts and trousers, too, if the government did not stop the collapse in prices.

So the regime intervened.

This may be because the Chinese Communist Party loves the citizens so much that it cannot bear to see them lose.

It is more likely to be because it is frightened that those tens of millions of stock-market losers (who were officially encouraged to invest) will start protesting in the streets.

Whether the Chinese regime’s power is secure or not, it certainly does not feel secure.

This latest government action is part of a pattern that extends back to the global bank crisis of 2008, after which China was the only major country to avoid a recession. It did so by flooding the economy with cheap money. So few people lost their jobs, but the artificial investment boom created a bubble in the housing market that is now starting to deflate: millions of properties lie empty, and millions of mortgages are “under water.”

Sooner or later, this game is going to run out of road. The risk is that China’s road ends where Japan’s 30 years of high-speed growth ended in the late 1980s, with a collapse to two per cent growth or less and a quarter-century of economic stagnation. China is around the 30-year point now, and its regime is doing all the same things that the Japanese government did just before the collapse there.

Gwynne Dyer is a freelance Canadian journalist.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

A candlelight vigil will be held in Red Deer on Thursday to honour the 350-plus people killed in the Easter bombing attack in Sri Lanka. Contributed photo
Candlelight vigil planned for deaths linked to Olymel COVID-19 outbreak

A candlelight vigil is being planned for those who died due to… Continue reading

Red Deer Rebels forward Jaxsen Wiebe battles Calgary Hitmen forward Cael Zimmerman for a loose puck when the two teams squared off in February last season. (Photo by BYRON HACKETT/Advocate Staff)
Calgary Hitmen shutout Red Deer Rebels

Rebels name centre Jayden Grubbe team captain ahead of Friday’s game

Traffic will be delayed on 40th Avenue and 19th Street until the end of February. (Advocate file photo).
Traffic delays expected downtown this weekend

Red Deer drivers will be delayed in the downtown area of the… Continue reading

COVID
Red Deer down to 313 active cases of COVID-19

Alberta reports an additional 411 COVID-19 cases

Bryson, six, and Mara, eight, play with puppies from Dogs With Wings Saturday. (Photo by Sean McIntosh/Advocate staff)
WATCH: Dogs With Wings introduces Red Deer program

A program that trains puppies to be certified service, autism, facility and… Continue reading

Former Toronto Argonauts lineman Chris Schultz remembered as a gentle giant

Former Toronto Argonauts lineman Chris Schultz remembered as a gentle giant

Los Angeles Kings head coach Darryl Sutter, top, is shown on the bench after NHL action against the Clagary Flames  in Calgary, Alta., Thursday April 9, 2015. Sutter says he has "unfinished business" as he returns to coach the Calgary Flames. THE CANADIAN PRESS/Larry MacDougal
Darryl Sutter has ‘unfinished business’ in return to Calgary Flames

Darryl Sutter has ‘unfinished business’ in return to Calgary Flames

Walter Gretzky talks to people while at the funeral of Celtic music legend John Allan Cameron at St. Isaac Jogues Church in Pickering, Ont., Monday, Nov. 27, 2006. THE CANADIAN PRESS/Nathan Denette
‘A legend in his own right’: Hockey world pays tribute to the late Walter Gretzky

‘A legend in his own right’: Hockey world pays tribute to the late Walter Gretzky

Jordan Spieth follows his approach shot to the ninth green during the second round of the Arnold Palmer Invitational golf tournament Friday, March 5, 2021, in Orlando, Fla. (AP Photo/John Raoux)
Conners builds 1-shot lead at Bay Hill as McIlroy lurks

Conners builds 1-shot lead at Bay Hill as McIlroy lurks

Team Canada skip Brad Gushue makes a shot as he plays Team Ontario at the Brier in Calgary, Alta., Friday, March 5, 2021.THE CANADIAN PRESS/Jeff McIntosh
Brier in the Bubble: Defending champion Gushue beats Epping in opening draw

Brier in the Bubble: Defending champion Gushue beats Epping in opening draw

Switzerland's celebrates after the final match at the Women's Curling World Championship in Silkeborg Denmark Sunday March 24. 2019. The 2021 world women's curling championship is back on the curling calendar. THE CANADIAN PRESS/AP, Ritzau Scanpix - Henning Bagger
Women’s world curling championship back on calendar, added to Calgary bubble

Women’s world curling championship back on calendar, added to Calgary bubble

A guard stands outside the gates of an immigrant holding centre in Laval, Que., Monday, Aug. 15, 2016. Several men at a Montreal-area immigration detention refused food this week as part of a protest aimed at drawing attention to what they say are inhumane conditions and to secure their release.THE CANADIAN PRESS/Graham Hughes
Montreal-area immigration detainees on hunger strike over COVID-19 fears

Montreal-area immigration detainees on hunger strike over COVID-19 fears

Minister of National Defence Harjit Sajjan takes part in a year-end interview with The Canadian Press at National Defence Headquarters in Ottawa on Thursday, Dec. 17, 2020. THE CANADIAN PRESS/Sean Kilpatrick
Sajjan aide emailed military ombudsman about allegations days after meeting in 2018

Sajjan aide emailed military ombudsman about allegations days after meeting in 2018

Most Read