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A Q&A With Derek Scissors on the Chinese Economy and Stock Market
In light of the stock market meltdown in China, AEI scholar Derek Scissors answers a few questions on the current state of China’s economy and what to expect going forward.
1.) What is going on with the Chinese economy and stock market?
Two different things. The economy is in the process of stagnation. It’s reversible but has been going on for some time. See my testimony last month before the House Committee on Foreign Affairs, Subcommittee on Asia and the Pacific.
The stock market is yet another Chinese asset bubble popping. They pop in property and debt, too. Chinese financial markets do not link risk and reward, so prices rise and fall on the basis of things like perceived political commitment. The Chinese stock climb and fall in 2007-8 was worse than this, for example.
2.) What is the likely way it will play out in the near and medium-term future, and what is the worst-case scenario?
The worst case is the market falls all the way back to the level it was at roughly a year ago, which is the level it had held for several years before that. No one in the world noticed when the Chinese market was at that level and, when the crash is over, no one will notice that it regained that level.
Right now the market is still 75% higher than it was in June 2014. Most likely it will hold at a level 40% higher than June 2014. And again no one will notice, until the next Chinese asset bubble pops up.
3.) Does the market meltdown make the case for reform or impede reform?
Good question. The more obvious answer is that it impedes. The Chinese government is reacting as if stocks crashing when it doesn’t want them to crash is a personal affront and tossing aside the idea they introduced in late 2013 of the market playing the “decisive role.”
But a more subtle point is that the only way to escape the permanent boom-bust cycle (we have one, but it isn’t permanent) is market-oriented financial reform. When the dust clears, it may be this case will become stronger. It’s definitely the weaker one now.
4.) What does China need to do to generate sustainable long-term growth?
–Move toward commercial rather than statist finance. Have banks operate to make money rather than serve as government fiscal tools, which will require some form of large-scale privatization. Allow money to freely leave the country as a check on non-commercial behavior.
— Shrink the state sector. One of the top two reasons (banks as fiscal tools is the other) that finance is non-commercial is the need to support loss-making state-owned enterprises. Fewer of those means more scope for financial reform.
–Allow workers to move freely to the right jobs. This situation is much, much better than it was 25 years ago but there are still multiple barriers to labor mobility and now China’s labor force is shrinking.
–Allow private ownership of rural land, where half the country lives. This is very hard ideologically but steps in the right direction are possible.
Published in Economics
5.) How does this affect me?
I intend this question literally, not rhetorically.
If you have a properly balanced investment portfolio (401k, IRA, etc) you should have a significant percentage in international stocks, part of which may be invested in China.
While the domestic stock market has been in the crapper this year, international stocks have actually done pretty well but they are starting to slip – at least partially due to the problems in the Chinese market.
Jim,
First, I find it pleasantly relaxing to have the burden of the myth of Chinese economic invinciblity lifted from my shoulders. You are taking things to a deeper level with a more precise analysis of how the Chinese have stumbled. I might respond by accepting your well researched analysis and asking the question why?
I think there is a clear answer. A Marxist regime is ultimately paranoid about the freedom of its own people. Thus they can not bring themselves to allow more private property rights or competition. Instead they are frozen at the controls and keep pushing state-directed spending. Now it’s hurting them badly and it’s also embarrassing them in front of the world as their stock market refuses to be controlled by its Marxist masters.
Can China evolve? Stay tuned.
Regards,
Jim
One should probably never invest “in” Chinese stock market. The Chinese stock market is a speculator market…there’s no transparency and no one trusts the financial info of the firms there.
You can get exposure to China through HK, or buy Chinese companies on the US stock markets.
Anyway, as to the original post, a few things:
1) China is not “stagnating”. Growth is slowing down, just as everyone would imagine it would slow down after a couple of decades of 10%+ growth per year. Everything converges at some point. But that’s not stagnation.
2) He gets it right that the Chinese stock market is purely a speculative market driven by Chinese politics. Hence it means very little.
3) The real question isn’t why it’s crashing. The real question is why did it jump up so high in a matter of 3 months after a pretty flat few years.
The answer is Chinese politics and policies. Little to do with the actual “economy”. China’s growth rate has been steadily slowing down for several years, but no one expected otherwise.
This is a 3-month boom followed by a 3-month bust. Short term reactions to politics.