Statist command and capitalist market economy imperatives are in conflict as the Chinese state tries to prevent the rout on Shanghai and Schenzhen stock markets spilling over into falling growth and social disorder. The 30 per cent wipeout of equity values since the boom peaked on June 8th looks like a market correcting a bubble when seen against their overall gains of 150 per cent over a year. But China's political leaders fear that the rush to sell will disrupt the wider political and economic transition under way and deprive the ruling communists of their legitimacy based squarely on economic success.
The sheer scale of these events is indicated when the losses are estimated as more than twice India’s entire stock market. The Chinese economy is 123 times larger than Greece’s, whose problems have received far more publicity. In fact the stock market absorbs a relatively low 15 per cent of Chinese household assets and is comparatively underdeveloped. But some 90 million investors own shares there; and in the boom over the past year at least 20 million newcomers joined the market.
This surge coincides with the huge transition under way from an internal economy based on exports by foreign multinationals and heavy industrial and infrastructural projects, including an immense construction sector, to a more internationally open one based on services and domestic consumption, but with a lower rate of growth. The transition is directed by the new leadership of President Xi Jinping and Prime Minister Li Kequing, who have rapidly centralised power, run an extensive campaign against party corruption and directed a more assertive foreign policy. They are afraid of being blamed by those who lose savings and are determined to prevent that happening by imposing a severe state-directed clampdown on trading to limit more speculative activity.
As a result critics ask whether drastic command methods can or should be used to stop markets correcting a classic bubble and if this will discredit the wider transition under way. So far China's strong economic fundamentals suggest that it will be able to withstand these market pressures. But there will be many losers and the shock to commodities such as steel signals how disruptive these events can be. In an uncertain international economy already preoccupied by the effects of the Greek crisis on Europe a further blow to confidence in China would leave only the North American economy adding buoyancy to world growth.
China’s leadership is pledged to give market forces a decisive role in its future economic development, including by raising domestic and international capital for extremely ambitious foreign infrastructural investments. The methods used to close off this speculative bubble could jeopardise that more open economic vision.