Editor’s Note: This article is part of a ChinaFile Conversation on the fall of China’s stock market. The full conversation can be found here.
On Monday, August 24, the Shanghai Composite Index dropped 8.5 percent, its second such steep fall since late July, and its worst since 2007. On Tuesday, stocks fell an additional 7.6 percent. The steep slide translates into more than $4 trillion in losses on China’s leading bourse since its June peak. Analysts watching a resulting global sell-off are debating whether it is a long-overdue correction in an overheated market or a sign that a longer-lasting economic slowdown is on the horizon. —The Editors
Derek Scissors
My view of both Chinese economic policy-making and the quality of our assessments of it is harsher than David’s and, certainly, Arthur’s. First a disclaimer: I don’t think the equities drama is important. Another stock bubble inflating and popping is not how to judge Chinese decision-making or our record as observers. These should be evaluated against the much larger backdrop of economic performance.
Arthur praises 35 years of what he sees as pro-market reform but questions whether the Xi government will consistently hold to this path. This may now be a common view.
In fact, the pro-market reform period was closer to 25 years. China began the movement away from pro-market reform at the 2003 third plenum, when Hu Jintao’s then-new government indicated it sought technological upgrading and less “disorderly” competition. Actions that followed introduced the investment-consumption imbalance—it did not exist in 2002—where investment was largely directed by the public sector. The gap between GDP growth and personal income growth widened, standard for a command economy.
Implementation of WTO concessions made by Hu’s predecessor masked the new policy direction but, by 2008, the switch to a new model emphasizing growth over productivity was clear. In 2009, China was even praised for this, with its enormous loan stimulus via state banks called “the gold standard” of global responses to the financial crisis. Instead, the stimulus reintroduced and greatly intensified debt problems, which had been slowly easing.
Many observers welcomed the Xi government because they had already consigned Hu and company to the failed, statist dustbin. The 2013 third plenum was lauded for re-embracing market reform.
I agree with Arthur that the 2013 plenum, while an improvement over stated Hu-era policies, was not an especially convincing program. But China’s policy missteps are certainly not two years old, they are at least six and arguably as much as twelve. The immediate implication is there is a much deeper hole to dig out from than most observers have been willing to recognize, at least to now. This may be why Premier Li Keqiang keeps emphasizing how painful reform will be.
It also raises David’s point—why did most people miss this? One reason is the world’s, not just China’s, obsession with GDP. Investment-consumption imbalances, merely moderate personal income growth, higher income inequality, environmental destruction—all were treated as secondary for years because China reported fast GDP. Not only was this a strange priority at the time, the flaws in the development model guaranteed fast GDP growth itself would fade.
Related but distinct is the emphasis of outcomes over the factors driving them. The China story was taken to be, not reforms granting private property rights and permitting some competition, but the numbers they generated. As long as the numbers were being reported (by what is effectively an arm of the ruling party), there was little concern about what was behind them. David calls this emotionalism, I call it bad economics.
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