Stock meltdown exposes how markets cling to myths about China

A bank clerk counts renminbi banknotes in a bank branch in central China's Anhui province Wednesday as world frets about quality of nation’s economy.
A bank clerk counts renminbi banknotes in a bank branch in central China's Anhui province Wednesday as world frets about quality of nation’s economy. AP

Their economy is slowing. Stock prices have plummeted. Global markets gyrate daily amid doomsday predictions for their country, so surely Chinese people are on the brink of panic, right?

Not so. Here in this Chinese city of 15 million people just north of Hong Kong, life goes on pretty much as normal. Outside a branch of China Merchants Bank on Wednesday, the streets were humming, but inside the tellers were having a quiet day.

Jin Jing, a 24-year-old bank manager at the branch and an investor, said the stock market declines have hammered her with paper losses of about 8,000 yuan - or about $1,270. But she treats it as a learning experience.

“There is not much they can do. When the crisis first began people were probably too obedient to the government direction, including me,” said Jin, a native of Shenzhen. “That’s why we all stayed in so long, then we’ve lost even more money.”

The past week’s roiling of global markets has again provided a reminder that, in opaque China, small reverberations can cause huge waves. But according to numerous experts, it has also exposed some myths about the world’s largest country that should be more obvious.

One of these myths is that China’s stock market is a weathervane for the larger economy. It most clearly is not.

Patrick Chovanec, chief strategist at Silvercrest Asset Management, is one analyst who has long warned that China’s stock market is an exercise in rampant speculation, and an irrelevant indicator of how the nation is faring.

“There plenty of reasons to worry about retraction in the Chinese economy but China’s stock market is not one of those,” said Chovanec, an adjunct professor of international affairs at Columbia University. The country’s bigger problems, he said Wednesday, involve managing debt and transitioning toward an economy that grows domestic consumption, instead of cheap imports.

China claims its GDP is still expected to grow 7 percent this year — an impressive number, even if hard to verify. Whatever the real growth rate, the country’s manufacturing output appears to be falling faster than expected. That’s causing major anxiety worldwide, especially for countries that export raw materials and semi-finished goods to China’s factories.

Last Friday, a negative report on China’s manufacturing output, combined with panic-selling in China’s stock markets, helped the Dow Jones Industrial Average to plunge 551 points, or 3 percent. The Dow plunged deeply again on Monday, then wobbled Tuesday. Over the last five sessions, it has dropped 10.5 percent, its biggest five-day fall since August of 2011.

Bill Bishop, a longtime China watcher who produces the Sinocism newsletter, said many U.S. stocks were due for a correction, with investors waiting for reasons to unload. They found them in China’s reported woes and the possibility of an upcoming rate hike by the Federal Reserve.

“The size of sell off was ridiculous,” Bishop said in a telephone interview on Tuesday night. “The idea that China is about to collapse is completely overblown.”

Yet Beijing may have brought some of its problems on itself, said Bishop, for at least two reasons. One of these is lack of transparency about economic decisions by Chinese leaders, which causes investors to be more risk-averse in the face of uncertainly. “They are far too opaque and we know far too little about how they operate,” he said.

A more recent problem, he said, is Chinese President Xi Jinping’s priority of “ideological retrenchment,” including requiring top party leaders to re-read books from the founding day of the People’s Republic of China. “If you have people re-reading Marx, it is not going to lead to good decisions on running your economy,” said Bishop.

On the streets of Shenzhen, it would be hard to notice a crisis of confidence. One of the world’s highest skyscrapers - the Ping An Financial Center - is rising from the central city. High-tech companies such as Tencent, Huawei and ZTE are headquartered in Shenzhen, often referred to as China’s Silicon Valley, at least in terms of hardware. Smaller entrepreneurial outfits are starting.

Yet even here, home to one of China’s two big stock exchanges, residents are wondering how China’s leaders will manage both the equity markets and the international fallout of the last week. While the wealthy elite make up the bulk of Chinese investors, some in the middle class jumped into the market during the run-up this spring, and have since been badly burned.

“I don’t feel much personal pressure with my investments, but there are all these customers who have bought stocks,” said Jin Jing, the bank manager. “A lot of them calling us, asking us: ‘Should I buy? Should I sell?’…That is where I feel the pressure.”

Monday's stock market slump provided 2016 U.S. presidential candidates with the opportunity to share their thoughts on China and who is to blame. (Nicole L. Cvetnic / McClatchy)

On Wednesday, the Shenzhen exchange fell another 3 percent, with the Shanghai Composite index dropping another 1.27 percent. Those drops occurred even after the Bank of China announced a rate cut aimed at helping the markets rebound. Since its peak in June, the benchmark Shanghai Composite has fallen 42 percent.

Jeremy R. Haft, an author and businessman who has worked in China for two decades, said China’s economic woes are part of a larger problem of managing risk in various sectors of society, ranging from food safety to exploding chemical storage facilities.

Recently, Beijing has attempted to regain control of markets through quick-fix interventions, such as propping up stock prices and devaluing China’s currency. Such measures, he said, have had “zero effect on the underlying structural risks.”

Haft also noted that international investors are similarly cavalier in assessing the downsides of China’s growth miracle.

“Do I think Wall Street is focused on the right indicators when it assesses the state of the Chinese economy? Not at all,” said Haft, who is the author of a forthcoming book, “Unmade in China.”

Wall Street and many economists, he said, have long fixated on China’s GDP growth as an indicator of economic strength.

“But Chinese GDP statistics are falsehoods. And GDP is the wrong metric to look at,” Haft said in an email exchange with McClatchy. “We should be looking at national wealth — the balance sheet of what a country owns versus what it owes. By this measure, America is 30 to 40 trillion dollars wealthier than China.”

Along with many other China analysts, Haft doesn’t think China’s economy is anywhere close to collapsing, partly because of unique safety cushions. Chinese citizens are notorious savers, allowing families to ride out downturns betters than their counterparts elsewhere.

Indeed, some analysts think that China’s slowdown, and attempts at economic reform, creates openings for new business. China’s middle-class is increasingly traveling abroad, and they come back wanting similar services to what they find elsewhere, ranging from neighborhood convenience stores, to healthy produce delivered to their door to sound investment advice.

On August 28, 2015 Marco Rubio, detailed the China-specific portions of his economic plan at an event in Charleston, South Carolina. His speech comes at the end of a volatile week on Wall Street many claim was triggered by China's economy.

Outside of China, entrepreneurs in countries such as Singapore, South Korea and Japan are working to fill this breach. In Taiwan, a company called President Chain Store Corp. - which has a franchise of Starbucks and 7-11 stores in Taiwan - has been rapidly expanding on the mainland.

Roy Chun Lee, a deputy executive direction of the Chung-Hua Institution for Economic Research in Taipei, said that only eight years ago, a mere 17 percent of Taiwan’s direct investment in China was for service industries. That figure, he said, has grown to 49 percent as of 2014.

“There’s a huge population in China and an under supply of basic services,” said Lee. Those kind of services, he added, are less regulated in China than service businesses such as banking and telecom, making it easier to break into the market.

Chovanec agrees. He said it could take longer than it should for China to reform its economy exports and build a services sector that serves a population of nearly 1.4 billion people. But as it happens, it will have enormous consequences for those who’ve grown accustomed to - and in some cases rich off of - China’s post-1980s model of development.

“If you are betting for the existing pattern of growth, you are in for huge shock,” said Chovanec.

“The world’s second largest economy is changing gears. That is an opportunity for some and a losing proposition for others.”

Michael Standaert, a special correspondent, reported from Shenzhen, China. Stuart Leavenworth, McClatchy’s Beijing bureau chief, reported from Taipei, Taiwan.