By Wade Shepard
A man walks past the Big Wheel inside a new casino following the completion of the second phrase of construction at the Galaxy Macau resort in Macau, China, May 26, 2015. REUTERS/Bobby Yip
“I keep telling my mother that she needs to make more diverse investments. She only wants to buy houses. She says that the stock market is only a place to lose money,” Cody Chao, a medical student in Suzhou, exclaimed at the end of May.
At that time China’s stock market was booming, chugging rapidly upwards on a bull run that saw the country’s two stock indexes more than double their value. New investors were flooding into the market, and everybody seemed to have been making money.
The medical student from Suzhou was aggravated that his parents rigidly maintained the conventional Chinese sentiment towards the stock market: it’s too inconsistent, too opaque, too corrupt, an easy way to lose money. In the words of Damien Ma, the coauthor of In Line Behind a Billion People, “. . . many Chinese think [the stock market] is almost like a casino and detached from economic fundamentals.”
After several misaligned attempts to use the banking system to deploy capital, the Chinese government tried something new: it decided to try a stock market. Some big, struggling state owned enterprises would go public, the people of China would put their money into them, and everyone high, low, and in the middle would prosper. It was a fund-raising attempt, a big transition towards stimulating the economy through markets rather than the usual course of outright fiat.
For a moment it appeared as if times had changed, as if the Communist Party’s plan to loosen its grip on the economy a little more was leading to fruitful ends. The government and its media mouthpieces talked up investing in the stock market, encouraging the rabble to jump in. Masses of traders were lured over to the gaming tables and kept turning up winning hands. Rumors (xiaodao xiaoxi in Chinese), drove the stakes higher, pulling in more and more new investors from across the population — two thirds of whom didn’t even have high school diplomas — who anted up on the chance that they could take a cut of their country’s corporate spoils.
“Beijing wanted to engineer a bull market just short of a bubble,” Damien Ma said. “It was hoping to use the stock market as one way to do equity financing for many of the SOEs [State Owned Enterprises] and help alleviate debt. It also thought households were having a harder time investing in property, so this was another channel for investment.”
Even the Communist Party couldn’t have predicted what happened next: more than 30 million new stock trading accounts were opened in the first five months of 2015. Just for perspective, that’s about the same as the whole population of Canada. The Shanghai composite shot up over 150 percent, which was paralleled by the booming Shenzhen composite, bringing the total value of China’s stock market up to over $10 trillion for the first time ever. Suddenly, it became clear than a familiar mainstay of the Chinese economy had again arisen: a bubble.
Paradoxically, one of China’s biggest economic challenges often results from its own success. This is a country with a population that has a massive amount of ready-to-invest cash. So any area of the economy that becomes “hot” tends to get a massive influx of rapid investment, which often pushes it beyond the brim of stability.
“The Chinese have the highest savings rate in the world,” explained Harry Wu, the financial editor of chineseinvestors.com, “which means they have cash on hand, and are looking for investment opportunities instead of bank deposits.”
China doesn’t lack individual wealth, it lacks viable options of where to put it. There are just not enough streams available to the public to divert the deluge of capital they have built up.
“The bottom line here is that China’s immature financial market simply does not have a diversity of investible products for households,” Ma, the author, said. “But you can’t really solve that problem simply by pushing people to get into the stock market.”
The stock market bubble burst on June 12th, as a good chunk of the gains from the bull run were quickly lost. The Shanghai composite dropped 30 percent and Shenzhen did not fare much better. Over $3 trillion of the market’s value was estimated to have been lost in the downturn, as the feeding frenzy quickly turned into a puke fest, with masses of traders trying to regurgitate their pungent investments and mitigate their loses as much as possible. The central government stepped in with hundreds of billions of dollars to keep the market afloat, but a good measure of recently gained investor confidence had been lost.
By this time Cody Chao and his mother were sitting in a hotel lobby in far away Melbourne. The television was blaring headlines about the stock market crash that had taken place back home, prompting his mother to turn to him and chirp, “Told ya.” The conventional Chinese take on the stock market had validated itself.