Commentary on Political Economy

Sunday, 20 March 2022

 

China’s markets have roared back but Russia is the elephant in the room

Was this Liu He’s “Draghi Moment?” The intervention of China’s vice premier and Xi Jinping’s senior economics adviser arrested the implosion occurring in China’s financial markets last week, just as Mario Draghi’s 2012 pledge that the European Central Bank would do “whatever it takes” saved the eurozone from a financial calamity.

With China’s sharemarkets tanking amid a massive exodus of foreign capital, Liu foreshadowed “concrete actions” taken to bolster China’s economy, with monetary policy at the forefront.

The Golden Dragon index of Chinese companies listed in the US had been down 36 per cent this month but soared 43 per cent late last week. It remains, however, more than 50 per cent below its levels a year ago.

The Golden Dragon index of Chinese companies listed in the US had been down 36 per cent this month but soared 43 per cent late last week. It remains, however, more than 50 per cent below its levels a year ago.CREDIT:AP

He talked down fears of an imminent delisting of Chinese companies from US stock exchanges, talked up support for China’s beleaguered property developers and indicated that the crackdown on China’s big technology companies would end soon. Regional pilots for a proposed new property tax would be shelved.

The CSI300 index of China’s major companies had slumped almost 14 per cent in the first two weeks of this month. After Liu’s mid-week intervention it bounced 7 per cent. The Golden Dragon index of Chinese companies listed in the US had been down 36 per cent this month but soared 43 per cent late last week. It remains, however, more than 50 per cent below its levels a year ago.

When Draghi saved the euro in 2012 it was with rhetoric rather than actions. While the ECB did announce plans to buy the debt of the distressed economies in southern Europe it didn’t actually do anything with the program it created until three years later when it launched a full-scale quantitative easing program.

Will China follow through on promises by Liu that are, in their lack of detail or any concrete measures, almost as vague as Draghi’s was?

The markets are expecting some monetary policy stimulus – cuts to interest rates and banks’ reserve requirements – as the authorities try to put a floor under China’s faltering economic growth.

The recent lockdowns of key provinces in response to outbreaks of the omicron variant of the coronavirus will make the achieving of China’s 5.5 per cent GDP growth target this year very difficult without significant fiscal and monetary policy stimulus.

Liu’s comments suggest that the monetary policy stimulus is imminent, along with efforts to address some of the more specific concerns of investors.

His references to property and the controversial property tax trial would suggest that Beijing is increasing its focus on stabilising its reeling property development sector and acting to support property markets after last year’s crackdown on leverage plunged the developers and China’s property markets, into crisis.

Xi’ Jinping’s leading economic adviser  Liu He now has to keep his promises.

Xi’ Jinping’s leading economic adviser Liu He now has to keep his promises.CREDIT:AP

The continuing “reforms” to China’s technology platforms have ravaged the value of its big technology companies. According to Liu China should “quickly complete rectification” of the platforms and, more broadly, should “actively introduce market-friendly policies and prudently introduce policies with a contractionary effect.”

His comments came after a hastily-called meeting of the State Council’s Financial Stability and Development Committee, China’s key financial policy body. They obviously carried weight, however, given that both China’s central bank and its bank regulator issued supportive statements almost immediately.

While the initial market reaction was relief, accompanied by the big recovery in share prices (although that could have been driven by short-covering), over the weekend there was considerable discussion among investors as to whether there would be a tangible follow-through.

While Draghi didn’t need to actually do anything in 2012 to calm markets investors in China have been increasingly unsettled by the big and unexpected shifts in China’s treatment of private capital over the past year. They’ll want to be reassured that Liu’s promises will result in real action in the near term.

The US has publicly warned China that any attempt to help Russia evade the West’s sanctions would result in it being targeted with the same sorts of measures that have plunged the Russian economy into chaos.

It was also notable that Liu’s comments, as they appeared in the state media, didn’t make reference to what would inevitably have been the elephant in the committee’s room, Russia’s invasion of Ukraine.

China has been at pains to maintain an ambiguous position on the invasion, advocating a negotiated solution and sending humanitarian aid to Ukraine but not condemning Russia’s actions.

It has been critical of the West’s sanctions on Russia, studiously avoids referring to Russia’s actions as an invasion or the conflict as a war and hasn’t ruled out providing financial and/or military assistance to Xi’s new “best friend,” Vladimir Putin.

The US has publicly warned China that any attempt to help Russia evade the West’s sanctions would result in it being targeted with the same sorts of measures that have plunged the Russian economy into chaos.

While that would be very costly to the West, probably precipitating a financial crisis and deep recession, at least – China is far more deeply enmeshed in western economies than Russia – it would be devastating for China, whose economic model has been built on the leveraging of the globalisation of product markets and fuelled by its access to global commodity markets.

Mario Draghi’s 2012 pledge that the European Central Bank would do “whatever it takes” saved the eurozone from a financial calamity.

Mario Draghi’s 2012 pledge that the European Central Bank would do “whatever it takes” saved the eurozone from a financial calamity.CREDIT:AP

An abrupt decoupling of China from the West would be a horrendous outcome for everyone but would hit China hardest. It needs a global economy and global markets, not a bifurcated global economy and markets, if its own economy is to function and enable its people to be fed and housed.

Just the threat of it caused investors – who’ve seen what happened to the foreign capital trapped in Russia’s equity and bond markets and who were already nervous as China’s erratic and unpredictable anti-capitalist policy shifts have developed over the past year -- to take flight.

Xi is committed to his “zero-COVID” approach to the pandemic. While they might be winding down, the regulatory assaults on the tech platforms are, given Liu’s comments, not yet finished. The property sector has yet to be stabilised. China will soon have to declare a position on Ukraine if it is to end the damaging speculation and the potential for financial crisis and significant economic damage.

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