Xi Jinping Stars as King Canute With Chinese Stocks

Bloomberg News is reporting that Beijing may be on the verge of unleashing some two trillion yuan ($280 billion) to prop up the mainland and Hong Kong stock markets. The plan would require state-owned enterprises to repatriate cash held overseas to buy shares. This follows a pronouncement Monday from the State Council, China’s top government body, that officials need to do more to stabilize the markets.

You can see why they’re worried. The CSI 300 index of mainland shares has lost about 42% of its value since January 2021, and Hong Kong’s Hang Seng Index is down some 48% over the same period.

Rational explanations aren’t in short supply. A continuing crackdown on credit in the property industry has dented home buying and other business that accounted for as much as one-third of gross domestic product. The economy has never fully recovered from draconian pandemic lockdowns, and foreign companies are shifting more production out of China to protect themselves from growing political risk. Demographic decline is underway.

Closer to the stock markets, Mr. Xi periodically cracks down on industries such as big tech that would otherwise form the backbone of the domestic stock market. Investors never know when the next hot company might be subjected to regulatory-political inspections or see an executive fall from favor and disappear for months or longer. The suppression of Hong Kong’s incipient democracy and rule of law is scaring investors out of the territory’s markets.

These developments would put a damper on markets anywhere, but Beijing’s approach to China’s financial system makes matters worse. The Communist Party allowed stock markets to open but not to function as they do in the West. Endemic Party interference in corporate management up and down the economy prevents the equity market from operating as a true market for corporate control.

This combined with Beijing’s hot-and-cold attitude toward foreign financial institutions over the years has stunted the development of institutional vehicles that provide better opportunities for retail investors while adding some ballast to the markets. Chinese savers as a result tend to view the stock market as a casino rather than a viable outlet for longer-term investing.

It’s notable that China’s domestic equity markets don’t appear to be absorbing the domestic household savings that now aren’t pouring into real estate. Much of the savings may be fleeing the mainland on the sly, as illustrated by recent stories in the Journal and New York Times about the use of crypto currency to move money to the U.S.

The Communist Party’s main goal in bailing out stocks appears to be stabilizing the market before the middle class—already hurting from the fall in property values—suffers bigger losses or something breaks somewhere else in the financial system. But the decline in Chinese stocks in recent years is symptomatic of deeper problems that no Canute-like command can fix. The economic rescue China really needs is for Mr. Xi to ease up on the Party’s political control of the economy.