07 July 2015

Daniel Drezner in Washington Post’s PostEverything on “The Politics of China’s Stock Market Collapse”

Daniel W. Drezner, “The Politics of China’s Stock Market Collapse,” PostEverything, Washington Post, 7 July 2015.

(Drezner is the model of a scholar who achieves relevance as a public intellectual. Click here to access his website.)

Nothing to see here, just the meltdown of Chinese equity markets.

So while every international affairs pundit and their mother are focused on the travails of an economy the size of Louisiana, the second-largest economy is experiencing a teeny-weentsy stock market meltdown. From Bloomberg: … “The rout in Chinese shares has erased at least $3.2 trillion in value, or twice the size of India’s entire stock market.”…

The more interesting question to ask is why the bubble was allowed to form in the first place. Here, there are some conflicting narratives. The Economist’s Free Exchange blog argues that the stock market was pumped up to enable and legitimize economic reforms… On the other hand, writing in the Wall Street Journal, Andrew Erickson and Gabe Collins argue that the bubble happened because of bureaucratic inertia:

“So why wasn’t China’s vaunted bureaucracy able to head off this policy train wreck? Well-documented bureaucratic turf wars between the People’s Bank of China (PBOC) and China Banking Regulatory Commission (CBRC) helped sow the seeds of some of China’s most pressing current economic problems—such as ballooning debt and use of shadow banking. Such infighting continues impeding the Chinese government’s response to the current market downdraft….”

“As such, the PBOC likely faces significant political pressure to continue pumping the stock market up, as this helps distract the populace from the fact that the market for residential real estate—the prior hot investment area—is flagging. For its part, the CBRC has likely been “captured” by the very banks it is supposed to regulate, further contributing to amplified systemic risk from shadow banking activities that are tougher to track and regulate than lending conducted through normal bank channels. Ultimately, conflicting bureaucratic priorities and infighting send contradictory messages to investors and likely fuel additional market instability.”

The hard-working staff here… will leave it to the Chinese economic experts to hash out that debate. The one thing that these analysts and everyone else agrees upon is that this will put a serious dent into Xi Jinping’s efforts to liberalize the Chinese economy….

…Indeed, there is no escaping the fact that China’s government has recently been extremely sensitive to what seems like minor matters. The World Bank redacted published portions of a report urging China to reform its financial sector for murky reasons, for example. … the China model appears to be failing this stress test. …

Click here for full text of the article quoted above: Andrew S. Erickson and Gabriel B. Collins, “Stock Slump Casualty: The Myth of Chinese Exceptionalism,” China Real Time Report (中国实时报), Wall Street Journal, 6 July 2015.

Related analysis: Gabriel B. Collins and Andrew S. Erickson, “Three SignPosts to Guide You as China’s Stock Market Crisis Unfolds,” China SignPost™ (洞察中国) 90 (5 July 2015).