Why Chinese stock market crash may not yet signal a crisis
These are strange times in Beijing. Since Saturday, the Chinese capital has been in a spirit of festive celebration. On September 3, China is holding its grandest ever military parade, showcasing its newest battle tanks, missiles and fighter planes to mark the 70th anniversary of the end of the Second World War and the end of Japanese occupation of China. Rehearsals for China’s V-Day began on Saturday: cleaned up Beijing streets, unusually blue skies (thanks to closure of factories and restrictions limiting cars to alternate days on streets), and an unusually festive weekend.
On Monday morning, however, all that was quickly forgotten. “What victory day is there to celebrate,” moaned a friend in Beijing who spends the greater part of his days monitoring markets on his iPhone 6 Plus. These have been a tough few weeks for him. Since June, China’s stock market has been in a state of free fall. The Shanghai stock market has lost more than four trillion yuan (around $645 billion) since its 5,000-plus high in mid-June.
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And that was before Monday: what’s already becoming known as China’s “Black Monday” has seen the biggest single-day loss since 2007. Where does this leave the Chinese economy? Beyond the horror show in Shanghai, for Beijing and president Xi Jinping, the greater worry is a further blow to their credibility when it comes to managing the markets: the Communist Party finds itself in an unfamiliar situation where its pronouncements seem to be falling on deaf ears. Assurance after assurance in the state media that the government wouldn’t let the market fall further and would prop it up seemed to have had little impact. This was even after the weekend announcement that pension funds would, for the first time, be allowed to invest in the market, opening up what is potentially an over $100 billion source of funds.
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Does this mean China is in a crisis? Surprisingly enough, not all economists agree. For one, the stock market in Shanghai has always been somewhat divorced from the real economy. As Chris Solarz, the managing director of US hedge fund Cliffwater and a close watcher of the Chinese economy, told me recently (although this was before Monday's big fall) that people tend to forget that the crash followed what was an inexplicable bull run at a time when the Chinese economy was clearly slowing down. We are only back to where we were in December 2014, when the market went on a surge of around 2,900 points and reached a high of 5,200 points in June before the "Great Fall".
More than the bloodshed in the markets in Shanghai, there is reason to argue that greater concerns for Beijing are in another set of numbers that came out in the past few days. In August, the Purchasing Managers’ Index (PMI), which reflects the health of the manufacturing sector, fell to a 77-month low, according to a survey by Chinese financial magazine Caixin. “The economy is in the process of bottoming out,” says He Fan, the chief economist at Caixin’s insight group, with the manufacturing sector - the powerhouse of China's economy - recording the biggest contraction since the 2008 global financial crisis. Crisis or not, what appears increasingly certain is that the slowdown in the Middle Kingdom is very much here to stay, and China's growth may never be the same again.