By Damien Ma
On Monday, the Shanghai Composite Index fell 8.5 percent, it’s largest single-day loss since 2007. This came on the heels of major government intervention to stem the market’s slide earlier this month. What happened? What does the latest chapter of the crash mean for China’s economy? And, more broadly, what does it mean for the policies and politics of China’s current leaders? ChinaFile, the Asia Society’s online magazine, asked top China watchers to respond.
Paulson Institute Fellow Damien Ma had the following comments:
As I see it, the core tension when it comes to the economy is that of credibility vs. control.
The Chinese government’s credibility has, for a long time, been largely predicated on its ability to manage a complex economy and can basically point to a very successful, if imperfect, record on getting the economy to where it is today. That credibility also stemmed from the fact that Beijing believed it usually had things under control, or simply asserted control when it felt the market wasn’t “doing what it was supposed to do.” The tendency to control is so ingrained that if they do not mitigate volatility or perceived instability in the economy, there seemed to be a palpable sense (or fear) that their longstanding credibility is being eroded.
But the current stage of reforms requires a different balance between credibility and control. Markets are inherently subject to bouts of volatility and occasional bubbles (and irrational herd behavior), and with proper regulations and legal mechanisms in place, the government then becomes more of a referee rather than an active participant, allowing the market to self correct. For market forces to be more credible, the government has to be able to tame its default tendency to control every moment of uncertainty. And it is also somewhat paradoxical that for about 1.5 years now, the central government has been consistently aiming to cut red tape and reduce the layers of administrative approvals for businesses–in other words, reducing government control–but the recent actions on the stock market seem to fly in the face of that effort.
In short, government credibility under a more fully developed and advanced market requires Beijing to sit out more than plow in with overwhelming force. Without sorting out this tension between control and credibility, it will make ongoing reforms more perplexing and potentially more difficult as it grinds forward.
As for the broader economy, we all await more economic indicators to see what the actual impact of the stock market drama is on growth, though likely minimal. Perhaps one silver lining here is that if growth is lower than the officially reported headline GDP—as many seem to suspect—we may be testing the bottom of near-term growth and how resilient the Chinese economy is to this slowdown. So far, we have not seen mass layoffs or much reported social unrest, which seems to suggest that jobs are generally holding up (whether they’re good jobs or not is another issue). And it also suggests that the old canard that anything lower than 8% growth and social instability will ensue never held much water.