China’s financial quagmire – The WTO-column

(Later also at Chinabiz)
When there would a an official raking of China’s major financial problems, this week the defunct stock markets in Shenzhen and Shanghai would be on number one, well ahead of the real estate bubble, the non-performing loans and smaller predicaments I cannot recall this morning.

Even when you are use to the always swinging pendulum of the endless bureaucratic power struggles, the reversal of the sales of state-owned assets on the stock market was quite amazing.
Of course, the official message on Monday was that China will still sell of the majority of non-tradable shares in its listed state-owned companies in due time, but retaining government control was firmly back on the agenda. It is similar to the signals about an upcoming floating of the renminbi; that will come too, when the government thinks it is ready for it. It might be a pretty long wait for those who have in interest in those changes.

The Shanghai and Shenzhen stock exchanges have been in the doldrums since the beginning of this century, the moment when the financial authorities started to play with the idea of retting rid of its majority control in listed state-owned enterprises in an effort to modernize its economy and fill the empty pension funds. The value of the shares has been dropping since and both larger and smaller shareholders have lost their appetite for participating in the always dropping exchanges. Every new plan, and we have seen thousands of them, caused a new drop.
If it had not been for the always optimistic government-run media, nobody would have reported anymore about China’s domestic stock markets. In other economies stock markets would be an integral part of the tools to facilitate trade in capital, but in China they have ever matured. Perhaps the early enthusiasm of the Chinese citizens when the stock markets opened for business in the early 1990s was not very healthy; an economy without a functioning stock market seems equally unwanted.
So, when new leaders were appointed last year to rule the commissions in charge of China’s financial markets last year expectations began to rise. The restart of a modest but apparent steadfast sale of the first non-tradable shares caused an effect everybody had expected. Just like in the past half decade, shares plunged to a new low. That effect should have been included when plans were announced, not only for this year, but at least for the three, four years to come. Then a healthy system of stock market could be in place.
Unfortunately, the counter-forces have prevailed once again. Like so often the pendulum of power moved back, as the central authorities refocused on other economic problems, like the overheated economy and a real estate sector that seemed out of control. The current push back of conservative forces, who want to stick to overall government control of the state-owned firms, is a real setback for all parties involved. The current central government started with an agenda two years ago that focused very much on reducing the bureaucracy and pushing market-driven solutions where possible. That agenda has been reversed this week rather firmly for the stock markets and that is unfortunately, since both the sales of non-tradable shares and finding a solution to fill the coffers of the social security are both issues that will remain firmly high on the list of dilemmas that have to be dealt with.

Fons Tuinstra