The Chinese bear market in shares has lasted since the peaks reached in the summer of 2015. The index of share prices for the Shanghai market has halved since June 2015. Then excessive exuberance tempted many domestic buyers into the stock market. A substantial credit expansion allowed people to buy shares on borrowed money. When the authorities called for more moderation and cracked down on some of the loans markets started to tumble, requiring the government to shift quickly from trying to end the bubble to trying to stabilise share prices.
Beneath the headlines and day-to-day movements in share markets lies a larger transformation in Chinese economic policy. China has been moving from an export and manufacturing-led model of growth to one based more on the expansion of domestic consumption and services. The government now seeks “high quality” economic development. It places increasing emphasis on environmental matters, responding to a public wish to clean up air and water which was badly damaged in the days of concentration on industrial output. They want to see “lucid waters and lush mountains”. Gradually industrial overcapacity is being eliminated through a reduced rate of new industrial investment and a closure programme for the dirtiest plants.
The government has managed expectations down from the heady pace of 10% economic growth to accepting something a bit over 6% on the official figures. They are also conscious that China’s growth since the 2007 western banking crash relied heavily on more borrowings, taking the leverage ratio for the private sector up from 150% to 250%. There has been a wish for the last couple of years to stabilise this. The authorities want to see private sector enterprises expand, and they continue to point in the direction of markets doing more, with regulators and government doing less. It is, however, still a very managed form of capitalism. There is a tension in policy between wanting to prevent too much borrowing, whilst at the same time wishing to make more lending available to business to expand and to consumers to spend.
…the Central Bank and the wider government are keen to avoid a further slowdown
China is a patient country and society, taking a very long term view. The aim of monetary policy as set out by the Governor of the People’s Bank of China is to create and maintain stability. This is defined as stable markets and a stable currency, with careful risk management to avoid unwanted volatility and unpleasant surprises. The Central Bank is also well aware of the need to support the real economy and has recently proposed three arrows to support private enterprise. These relate to making it easier for companies to get access to bond and equity capital and to credit. The bond support is well developed and entails banks providing insurance against credit risk with some back up from the People’s Bank itself to give markets confidence in buying company bonds. They are working on routes to improve access to equity money.
The Central Bank is engaged in a gradual move towards more market-oriented solutions. It still relies on quantitative controls on credit as well as on interest rates and the price of credit. Conscious that credit growth has slowed – and with it the economy as a whole – the authorities have recently reduced the reserve asset ratio again for commercial banks, freeing an estimated net 800bn renminbi for additional advances. The Central Bank is keen to discipline the shadow banking sector, but also explains that a well-regulated shadow banking sector with strong investment firms is an important source of additional capital for Chinese business.
Judging from their official statements, it seems as if the Central Bank and the wider government are keen to avoid a further slowdown and are taking careful actions to offer more support to the growth rate and to private sector businesses. They remind the US that they have not been engaged in a Chinese devaluation policy at America’s expense, and sound as if they would like to find a solution to the trade dispute, without of course appearing to give in. It may be we have seen the worst of the stock markets’ performance, with shares now much better value than a couple of years ago, and a policy geared to avoiding extremes.
The above article was previously published by Charles Stanley on 8th January 2019