Chinese stocks rose the most since 2008 on Monday, responding to a huge stimulus package announced on September 24 by the country’s Central Bank, which included a cut in interest rates, reduction in reserve ratios and support for the real estate sector by way of lower mortgage rates. It also announced measures to support the stock markets, an indication of official concern over a prolonged bear market.
Unlike past stimulus measures this one seems to have done the trick with the CSI 300 Index rising 8.5 percent on Monday, as per Bloomberg. For perspective the market has risen 20 percent in the last 9 days, recouping around half of a 45 percent decline since mid-2021. There was a frenzy of buying, Bloomberg reported, as investors were gripped by FOMO, or Fear of Missing Out for the uninitiated.
Indian markets, to which FPIs were returning with great vigour in the last two months, may face stiff competition in the short-run.
75th birthday as a catalyst
The timing of the stimulus may not have entirely fortuitous, with the 75th anniversary of the founding of the PRC (People's Republic of China) on 1 October 1949, the authorities may have been eager to dissipate a gathering sense of gloom. Seventy five years is a long time.
The PRC has now outlasted the Soviet Union. As the market frenzy indicates, it's also a very different state from the one Mao Zedong established after his victory in the Chinese Civil war.
The euphoria over the market rally notwithstanding, China's policymakers have their work cut out. The country's manufacturing PMI index has been in contraction territory for five months between June and September, and youth (defined as those between 16 and 24) unemployment rate was just under 19 percent in August.
Downsides to the journey back
China's policy makers may struggle to revive animal spirits. Its recent economic malaise is largely because of supreme leader XI Jinping’s attempts to return China closer to its revolutionary roots, which has involved increasing the Communist Party's hold over the private sector.
China has a large private sector with many world-beating companies, but they are now unequivocally subordinate to the Communist Party in a manner that was not the case in the years since 1978, when Deng Xiaoping set in motion the so-called reform and opening-up policy.
Long march backwards for China’s capitalists
At the policy level, China has prioritised investments in sectors like electric vehicles, renewable energy, artificial intelligence, high-end semiconductors --- essentially industries at the technological frontier--- over consumer internet companies. The most famous example of this is the ruthless defenestration of Alibaba founder Jack Ma, once the poster boy of Chinese entrepreneurial derring-do.
Stocks of companies offering online tuition, Edtech companies in industry parlance, have been severely hit by curbs.
Xi, it seems does not like China's best and brightest congregating in sectors like food delivery, ecommerce or even finance and real estate. Instead he wants to focus on high technology sectors. The official narrative is that China should shift gears to achieve high quality growth as the supply of cheap workers for labour-intensive industries --- the growth engine for the post 1978 economic boom--- dries up.
Industrial policy with CCP’s characteristics
Some of this is also undoubtedly driven by national security considerations, notably the relentless crackdown by the US on China's access to advanced technology. As a result, self-sufficiency has become a priority for the authorities.
There have been some impressive achievements. Huawei, the Chinese telecom equipment maker, survived what once looked like crippling economic sanctions. Chinese companies are trying to compete with Nvidia and TSMC in high-end chips.
Chinese EV makers are now among the best in the world--- on par with Tesla-- and its adoption of renewal energy, notably solar, means that it is a leader in the transition from fossil fuels.
Clearly this is very different from Maoist-era policies. The private sector is plying a leading role though the state is firmly in charge, setting priorities. It is not in fact miles removed from industrial policies which are very much back in vogue, from India to the US.
But it's the nature of authoritarian regimes to commit excesses. In the recent past, as per international media reports, salaries are being cut in China's financial services firms as part of a long-term drive to reduce the attractiveness of the sector and to prevent perils such as the financialization of the economy, which is said to afflict the West, particularly the US.
Other steps to rein in the private sector also include the revival of Communist party cells in private sector companies, which had become moribund before Xi became General Secretary in 2012.
All of this has cast a pall over China's private sector and the younger generation. Currently, Chinese censors are busy scrubbing the term 'Garbage time of history' from online forums as per media reports. The term is meant to signal widespread pessimism about economic prospects.
Thus unless there is a fundamental rethink of the economic policies followed in the XI era, the stimulus is only likely to be a temporary palliative.
There is also the looming challenge of population decline. China's demographic dividend is long gone. And while the one-child policy has been scrapped there is little sign of an uptick in births. China's total fertility rate is 1, well below replacement rates.
The stock market boom notwithstanding, it's unlikely that these measures will be reversed substantially. China is likely to continue to remain inhospitable for private capital, notably foreign private capital. The party’s crackdown on the private sector may cast a shadow over the country’s prospects for the next 25 years.
Bodhisatva Ganguli is Group Consulting Editor Network 18.
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