China Bails Out Stock Market with $209 Billion Stimulus, but Who's Getting Saved?

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  July 20, 2015

China Bails Out Stock Market with $209 Billion Stimulus, but Who's Getting Saved?

Political economist Zhun Xu of Beijing's Remnin University says China is bailing out its own public enterprises as part of a flawed plan to jumpstart the economy through the stock market
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JESSICA DESVARIEUX, PRODUCER, TRNN: Welcome to the Real News Network. I'm Jessica Desvarieux in Baltimore.

So if you've been paying attention to the Shanghai Stock Exchange you've certainly noticed that shares have fallen dramatically over the past four weeks. The Chinese government responded in kind. China's 17 largest commercial banks lent 1.3 trillion Yuan, which is the equivalent of about $209 billion, to the state-backed margin lender China Securities Finance, basically providing stimulus to the markets.

Now joining us to discuss all of this is Zhun Xu. He teaches political economy at Renmin University in Beijing. Thanks for joining us.

ZHUN XU, RENMIN UNIVERSITY: Thank you for having me.

DESVARIEUX: So Zhun, I'm trying to understand what exactly happened. Was this caused simply by speculation?

XU: Well there's definitely the factor of speculation in this crash. But it's more like structural forces behind this raise in prices.

So from last year to now the Chinese Shanghai Stock Exchange rose about 150 percent, and then recently it crashed down to 3500, which is still very high. But then it's a dramatic fall from the previous high point. Many people got very mad about it.

DESVARIEUX: Okay. And who did it really affect? Because in my understanding less than 10 percent of Chinese households actually participate in the stock market. So who is really affected?

XU: That's true. According to the recent survey only 6 percent of Chinese households actually invest in the stock market during the first quarter of 2015. And also speaking of the real economy only 3 percent of the total financing last year came from the stock market. So the ones who are really concerned about the stock market are a very small stratum of the working class and [of course] the governments and large corporations.

DESVARIEUX: I could imagine this liquidity though being pumped into the market was helping those corporations and those government-owned enterprises, as you mentioned.

XU: Right. Well, I think [inaud.] is short on stimulus. But the long-term project in their minds, I think it's more profound. As the overall Chinese economy is currently slowing down and the Chinese government is really eagerly looking for new alternatives to maintain the economic growth. And they have rediscovered the stock market as one of the solutions. So they were expecting two things from the stock market boom.

First, they were expecting the household, they get more wealth income from the stock market. It would increase their consumption. The second, if they keep deregulating the stock market, they have done that many times, and recently they have removed many regulation on leverage [advancement], which obviously contributes to the recent crisis. And if they keep doing that, they believe this would enhance the economic efficiency and also contribute to growth.

So it's a very important part of the overall economic program of the government. And they obviously thought everything was under their control. So it is not surprising they got into a panic when this doesn't work.

DESVARIEUX: So you mention growth. Do you think that means that China's ability to dictate economic growth has its limits after something like this just happened?

XU: Well, comparatively speaking Chinese government is still the strongest in terms of controlling the market forces. But only in the traditional way. On the stock market, on the financial markets, when you have leverage investment you can have trillions of dollars in a very short period of time. That's something currently beyond their, I would say imagination or capability.

So encouraging investment, encouraging the stock market boom obviously increased the risk that the Chinese government cannot control the market.

DESVARIEUX: You also mention consumption, and that being a big part of their economic plan, trying to increase consumption. How is China doing in terms of the level of consumption?

XU: The--well, since a number of years ago Chinese growth has been relying solely on investment and very little consumption compared to international standards. So the Chinese leaders, policymakers, have been concerned about that. But a real long-term solution to that for a problem would be increase the purchasing power of the working class, giving them living wage, decent working conditions, et cetera. But the government has been avoiding that. They have chosen a relatively easier way, is to boost their wealth through a stock market boom. But obviously that's not stable.

DESVARIEUX: What is the role of the United States in that, in terms of you mentioned raising wages, living standards for everyday workers? I could imagine United States corporations wouldn't want something like that to happen.

XU: Well. I--well, I believe so. But the problem is we live in a globalized economy. And every increase in workers' wages could be an actual cost to the company owners who would avoid that. So if the Chinese workers raise the wage by 10 percent and that might drive some capital outside China, go to Vietnam or go to other countries, or go to some other, different provinces of China, that has been going on in recent years. And I think that's what the Chinese government have been worrying about.

DESVARIEUX: All right. Zhun Xu joining us from Massachusetts. Thank you so much for being with us.

XU: Thank you.

DESVARIEUX: And thank you for joining us on the Real News Network.


DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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