How quickly do economic visions evaporate or fade away. Prophesies of financial strength and good fortune can be blown aside like a feather set adrift in the sky.
Last January, Chinese Premier Li Keqiang revealed a vision for his country at the World Economic Forum in Davos where he committed to structural reform based on moderate, consumer-led growth.
It took less than a year—seven months in fact—for Keqiang’s dreams to collapse, only to find his country at the heart of a financial crisis that has spread like a virus across major global economies.
The global stock market rout has been estimated to have lost $8 trillion and has sent investors scrambling for safe havens for their money until matters settle down.
China has already injected $100billion into the country’s markets and has cut interest rates five times.... But analysts fear that these moves may not be enough…
Li never saw the disaster coming and was confident of a continuation of what was reported to be a 7 percent annual economic growth. Now, the biggest stimulus effort since the 2008 global financial crisis is being implemented in an effort to strengthen a weakening economy.
Confidence Sought
China has already injected $100billion into the country’s markets and has cut interest rates five times to record lows in an effort to restore confidence. But analysts fear that these moves may not be enough and that aggressive action may be needed in order to avert an even deeper crisis as capital flight swells.
According to people familiar with situation, officials have halted intervention in the stock market as massive selling pressure heightens the cost of supporting stocks. Instead, the People's Bank of China (PBOC) took a double-barreled approach late Tuesday, lowering interest rates once again and the reserve requirement ratio (RRR) by 25 basis points. The central bank has also intervened in the foreign exchange market to prop up the yuan.
The China Financial Futures Exchange took an additional step towards curbing speculation by restricting trading in stock index futures. This, in addition to Chinese banks that are being encouraged to lend using lower perimeters, as well as adding infrastructure spending as part of the resolution.
The news of the additional moves sent China's highly-volatile Shanghai Composite index of equities plummeting another 1.3 percent to 2,926.3 late Wednesday, after turning sharply lower in the final 10 minutes of trading. According to one economist, it was a deliberate strategic decision to let the stock market find its own level rather than once again intervening in its movements.
Fault-Finding
As the stock market continues to slide, scapegoats are sought. Authorities have recurrently blamed market manipulators and foreign forces since the sell-off began in June resulting in an unprecedented stocks-support program. However, with the failure of the program, new allegations are coming to the forefront.
Hu Xingdou, an economics professor at the Beijing Institute of Technology, believes that more needs to be done to curb corruption and he calls for authorities to assume the responsibility for doing so.
Some actions seem to be in place. Police are investigating people connected to the China Securities Regulatory Commission including a former employee, for insider trading and forging official document stamps.
Corruption Probed
At Citic Securities Co. eight people are suspected of illegal securities trading and the Caijing Magazine employees are under investigation for allegedly falsifying information and spreading fake stock and futures trading information.
Xinhua is urging stricter enforcement to clean up the markets and believes that additional probes will help make the “Chinese stock market a just place and give the market a future that is healthy and stable.”
Not all analysts believe that the corrupt Chinese stock markets is the reason for the current crisis. Some attribute the global market rout to an expectation of a Fed rate increase in September, not the problems with the Chinese economy.
Others disagree and believe that although the uncertainty with the Fed’s move to finally raise interest rates may indeed be a reason for part of much of the rollercoaster ride in many Asian bourses, it is not the cause of all of Beijing’s financial problems. They point to other factors that have aggravated what has turned out to be already shaky economic conditions in China such as having less reserves than reported. In fact, they claim Beijing has one of the lowest reserve ratios among emerging markets.
Li’s vision of his country’s economic success is a thing of the past and he must deal with the facts on the ground as they exist today. Additional liquidity from the banks, higher interest rates and more POBC intervention in the exchange markets in an effort to defend the yuan seem to be the direction the Li government must pursue if the country is to dig its way out of its current quagmire.