Turmoil is never far away these days in China. Leading Party figures must have been glad to see the back of a year marked by slowing growth, stock market turmoil and the unusual sight of a government that appeared to be in utter disarray during the summer months. Yet 2016 has hardly started any better. Indeed, many officials may come to look back on last year’s problems with a hint of nostalgia, remembering simpler and easier times.
The first signs of trouble came before the first week of the year was out. Circuit breakers designed to stop mainland stocks from falling by more than 7% in a single trading session, were activated twice in two days, before being formally suspended on January 8. Ten days later, Beijing’s National Bureau of Statistics (NBS) released data suggesting that China’s economy grew by just 6.9% last year, the slowest rate of expansion since 1990.
This, coupled with an often erratic approach to managing its increasingly volatile currency, the renminbi, stoked concerns that China’s economy and financial system may be in a stage of rapid deterioration, leading some to fret about who, if anyone, is really in charge.
“It’s hard to gauge what is going on in Beijing, and how direct is the influence of people close to the president,” says Bill Stacey, director at the Lion Rock Institute in Hong Kong. “It’s hard to know who is in control, what is going to happen next, and whether the opinions of anyone at the central bank or the securities regulator are really being heard.”
Rumour and counter-rumour trailed Chinese officials to January’s World Economic Forum in Davos. George Soros, chairman of Soros Fund Management, told delegates at the Swiss resort that a hard landing in China was “practically unavoidable”, adding: “I’m not expecting it, I’m observing it.”
Chinese vice-president Li Yuanchao sought to allay investor fears, insisting that the country had entered a phase of “steady rather than speedy” growth and that plans were on track to replace manufacturing and exports with services and domestic consumption as the primary growth engine.
But doubts continued to swirl around Davos, eliciting some surprisingly honest appraisals of the government’s recent decisions and performance. Fang Xinghai, vice-chairman of the China Securities Regulatory Commission and a key member of president Xi Jinping’s financial policy committee, admitted that Beijing had blundered when installing the circuit breakers.
“They are a standard practice in a lot of western markets, so we thought that perhaps it could work in China as well,” Fang told reporters. He blamed the failure of the mechanism squarely on currency volatility and the immaturity of the country’s stock markets.
The challenges facing China are many and mounting. Few investors or policymakers away from, or indeed on, the mainland believe the veracity of the NBS’s data. A lack of clarity about how fast the world’s second largest economy is growing, let alone what Beijing plans to do to stabilise the currency or tackle the issue of rising corporate indebtedness, have left some wondering whether a hard landing is the least of the country’s fears.
Analysts and investors say party leaders could allay at least some of these concerns by pushing through much-needed financial reforms, from liberalizing the capital account to resisting the temptation to artificially prop up onshore stock prices.
This is the start of a long-drawn-out process of transition toward a western-style IPO registration system. For the first time, institutional and retail investors will be allotted shares in the seven new IPOs, rather than deploying capital in the hope of being granted a few, precious securities. That move is also intended to have other benefits, such as rooting out corruption and preventing too much liquidity being drained from the system prior to a new share sale.
But this is still only the beginning. Beijing still has to decide how to deal with its own worst enemy – itself, or, to be more specific, its natural aversion to risk, which results in reforms being watered down to alleviate any whisper of social, financial or economic unrest.
“China is moving toward a more open system, but the question is whether it can achieve its ambitions without reverting to the temptation to intervene if things go awry,” says Louis Wong, managing director of Phillip Securities in Hong Kong. “China needs a laissez-faire securities system, but the regulators will always be tempted to intervene. It will take a long time to change that mindset, and I am afraid it may never happen.”