How The Chinese Debt Bubble Led to the Stock Market Plunge
Johns Hopkins professor Ho-fung Hung says we are seeing a continuation of the stock market collapse from the summer of 2015, and executive measures to rescue the market can only create more trouble in the long run
SHARMINI PERIES, EXEC. PRODUCER, TRNN: Happy New Year, and welcome to the Real News Network. I’m Sharmini Peries coming to you from Baltimore.
On Monday, one of the major stock markets in China, mainly the Shanghai market, plunged 7 percent, ending trading for the rest of the day and sending global stock markets into a decline. According to trade rules introduced last month in China, a 7 percentage point drop triggers an automatic suspension of trading. The effects of the market decline have been felt in markets around the world, with the Dow Jones plummeting over 450 points, and stock markets of major corporations like Microsoft, Apple, Netflix, Goldman Sachs seeing considerable percentage point declines.
Joining us now from Baltimore, Maryland to discuss this is Ho-Fung Hung. He’s the author of The China Boom: Why China Will Not Rule the World. He’s an associate professor of sociology at Johns Hopkins University. So good to have you with us.
HO-FUNG HUNG: Hi. Thanks. You’re very welcome.
PERIES: And so let’s just begin with what caused this stock market crash thus far.
HUNG: The stock market crash yesterday is actually a continuation of the crash in summer. Because in the summer there was a huge bursting of the stock bubble, and China’s government resorted to some extreme effort to arrest the freefall of the stock market. And one of the extreme effort is to, the government issued an edict and telling all these major, big state-owned companies’ executive cannot sell the stocks of their own company. So it prevents some big players in the market from selling their stocks, that they can only hold on to the stock without selling it.
So it is one of the measures that helps stabilized the stock market in the fall. And the China stock market has risen up a little bit, moved back just a bit [inaud.] in the fall. But that edict of not allowing state-owned company executives to sell their stock of their own company actually expired yesterday. So it’s expected that once the edict expired that the people will be rushing to sell their stocks before it is too late, when the market is still stable. Of course, and it caused a little bit of a stampede. Actually many people already expected it. So this one-day stock market plunge yesterday is kind of a continuation of the stock market collapse in the summer.
PERIES: Now, this practice of buying your own stock or buying each others’ stock by corporations is something that’s practiced here. In fact, I just did an interview with some economists in the UK, and this is a problem there. Why is it a problem, and why did the Chinese government introduce this restriction?
HUNG: Because a lot of the stock market bubble that actually, that China’s government and many state-owned enterprises helped fanning since the fall of 2014 and spring of 2015, China’s economy, the real economy, manufacturing expansion, [inaud.] construction and infrastructure construction, it has been slowing down for a while since at least 2012-2013. And many companies, particularly the big state-owned enterprise, are heavily indebted. So they are on the [road] of getting underwater.
So in the fall of 2014, the Chinese government and many big players among the state-owned enterprises, they see to risk, take the risk of creating a stock market bubble and imagine that rising stock market can help them become a [inaud.] again. Because when the stock market rise, they can sell the stock that they have been holding for their own company or each others’ companies so that they can come up with cash to service or repay the debt. So it is the plan to create a stock market bubble that helped [inaud.] the debt problem of many local government and state-owned enterprises. Of course, and it didn’t end up very well. And as many people expected, that this kind of stock market bubble [with the] an underlying strength in the economy, is [inaud.] to question, it did crash in the summer.
So when it crashed in the summer, many state-owned enterprise who has been selling and buying stocks of their own company and each others’ company, become the culprit. And the Chinese government doesn’t want to look back, because the political [inaud.] of the government has been so much dependent on the economic performance, and one of the key economic performing is the stock market. So the Chinese government resort to these extreme method, to stopping the executive of the state-owned enterprise from selling their own stock and each others’ stocks.
And it worked a little bit, but it cannot last forever. Because people will scream if they stop them from selling their own stock forever. So that has to be, has to have an expiration date. And when the expiration date come [as yesterday], it create a bigger problem.
PERIES: Now, Professor Hung, if this kind of restriction that the Chinese government is placing on their market is having this impact there, will this also impact the global market? And how is the global market responding right now to this crash?
HUNG: This crash definitely contribute to the fall in the Dow Jones today and in the stock market all over Asia and Europe but this kind of effect is more or less short-term. But more worrying is the long-term effect of China’s economy on the world economy is that the 2008, the U.S. witnessed the crash of itself. And then the global financial crisis hit many places, and China became, you can say even a lone engine, that provides demands and helps for many other economies. So through China’s own stimulus program that they rolled out in 2009-2010, that basically they opened the floodgate of bank lending to local government and state-owned enterprises to build things. High-speed rail, railroads, new airports, steel mill, and they don’t care about whether these kind of things are going to be profitable, they just build it, and then create an economic bubble. A debt bubble as well, because many of these constructions are financed by [less] lending of Chinese banks.
But it pushed up the GDP, and it pushed up China’s demand for raw materials from around the world. So you see that Brazil has been doing very well, and untouched by the U.S. economic crisis back in 2008. And then in 2009, 2010, 2011, 2012, [inaud.] trying to rebound, create kind of an effect or elevate the economy of Latin America and Africa, Australia, Canada, which export a lot of raw materials to China, to fuel China’s debt-financed construction spree. So it has been kind of a key engine that prevented total collapse of the world economy when the U.S. economy was in trouble, and Europe because of the eurozone crisis was in bigger trouble.
Now, the European economy was still in the kind of dismal state. It has not fully recovered from the eurozone crisis. And the U.S. economy is kind of recovering, but not strongly. And it is still a kind of feeble recovery, that even the Fed are not quite sure whether it has, it can aggressively increase interest rates faster. So it is kind of a weak recovery in the U.S., and Europe’s still in trouble. And China was entering into a long slowdown since at least 2012-2013. So it instantly create a problem for all these raw material exporters, like Brazil, was in big trouble, its economy. South Africa, Zambia, all other kind of African economy. And many U.S. companies like Apple, Caterpillar, and GM that has a strong presence in China, and that also hit by the decline or slowdown of the expansion of the Chinese market. So it is going to be creating a global headwind for everybody.
PERIES: Could it be considered that stopping or restricting the reacquisition of your own stock really helps stimulate the local economy in the sense that it forces people to actually take their money and invest it in industry and production instead of finance? Is this not a good measure, and should other economies adopt this policy?
HUNG: A not particularly good measure, because you cannot stop people from selling stocks of its own company and whatever forever, because if you want to have a stock market you need to have kind of a freedom of selling and buying. If you try to adjust the market and then help the market by these kind of executive administrative measures, high-handed administrative measure, then it’s no longer a market. And then if it is, people find that they might have trouble selling the stocks when the stock is going down, and then it will actually prevent and discourage people from buying stocks in the long run.
So this measure can only be a kind of a short-term measure out of panic, and in the long run it is going to hurt the market. Because if your people expect that if the market is not doing well enough, if the market is going down, that I need to sell my stock, there is a possibility that the government will stop me from buying stock, from selling my stock when I need to, to cash in. It would definitely discourage me from buying stock in the future. So this is not the way to go.
And of course it is only one measure that the Chinese government adopted in the summer. There are many other measures, executive [inaud.] and high-handed measure that the Chinese government did in the summer. For example, they are trying to stop people from short-selling stocks as well. They are trying to claim to investigate in the people who are selling or short-selling stocks, and we have some criminal charges, and at some point they even sent police to take over some of the documents from the regulatory bodies of the stock market in China.
So it is all these kind of measures, short-term, that made sure that the Chinese government at that time back in August was in panic mode. And it arrested freefall of the stock market for a while. But as I said, that in the long run you cannot resist the market force, and this kind of executive high-handed measure to rescue the market can only create more trouble in the long run.
PERIES: All right. Professor Ho-Fung Hung, thank you so much for joining us today.
HUNG: Thank you for having me.
PERIES: And thank you for joining us on the Real News Network.
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