South China Morning Post
Comment›Insight & Opinion
Andy Xie says many ordinary folk have wisely avoided getting embroiled in the turmoil this time, leaving the leveraged scammers scrambling for government help
History repeats itself first as tragedy, and then as farce.” – Karl Marx, 1852.
The A-share market is crashing. The financial media is frantically looking for saboteurs. Rumours are flying that desperate people are throwing themselves out of the window. When nothing works, the howls for a government bailout sound like hungry wolves at midnight. It feels like déjà vu; the noises are almost identical to what people heard after the market began to crash in late 2007. But, there is one big difference: not many ordinary people are talking about it.
Pianzi is a unique Chinese term. It has a similar meaning to swindler, scam artist or conman. Its uniqueness is that a pianzi often thinks he is doing his victims a favour. When someone buys a fake Rolex, if the person isn’t aware it’s a copy, they pay less for the same feeling, and the pianzi makes a fat profit. Isn’t that good for everyone?
When the market began to rise last autumn, as usual, the big pianzi poured in first, and the little ones followed. They chuckled about the fools to come. To double up, they borrowed trillions of yuan to leverage up. Of course, the media noises were dominated either by those who were paid off or who joined the game of how to rob the little people.
Yes, fools came. But on the way to the slaughterhouse, most survivors of the previous games didn’t show up. The ones who did show were the youngsters who had little money to be parted from. One day, all the pianzi suddenly realised that the market was just them; the dumb, fat lambs weren’t going to come. Soon, it became a game of pianzi killing one another.
When people don’t fall for the trap, the market turns to the other fat lamb – the government. To scare the government, social stability is always cited as the reason a bailout is needed. Usually, the government’s first step is to stop the initial public offerings. But that only stops new pianzi from diluting the game. The real bailout is to find dumb money and in sufficient quantity. Will the government cough up? I seriously doubt it.
The central government has a knack of sucking people’s money into its pocket. When it is asked to cough up, there’s usually a lot of supporting language, but seldom cold cash. The most unusual feature in China’s economy is that the government loves to join the game, rig it and take the money for itself. All the pianzi out there looking for a government bailout will probably be disappointed.
China’s stock market bubble was marketed as a reform strategy. While people were watching how it would work, precious time was wasted. This story, unfortunately, has been repeated again and again at great cost. China’s economic problems – overinvestment, dependence on exports and too much debt – became obvious in 2008. Many tricks since then have been sold as cures, but they have led to mushrooming debts, more problems, and a few people siphoning off huge sums of money.
Chinese people are among the hardest working and most efficient in the world. Virtually everyone is working. Overtime is ubiquitous. Retirees are looking after their grandchildren so their daughters can work. And yet, Chinese wages are one-eighth of the Organisation for Economic Cooperation and Development level. The main reason is that China’s system wastes resources massively. The political system is often the reason for the waste, for the purpose of enriching a few. A bigger challenge than the market crash is how much money is missing from the credit system. China’s debt has quadrupled since 2007 in US dollar terms, while nominal gross domestic product has doubled. A big chunk of the increase has been siphoned off to join the speculative capital. As the speculative bubble bursts, the non-performing loans will mushroom. Some may take the remaining cash and leave the country, as happened in Southeast Asia in 1998.
The chances are that China’s financial crisis has begun. The game of ramping up asset prices to cover up bad debts is coming to an end. Deflation will probably take hold. The government will find new ways to roll over debts in commodities and commodity industries. More and more zombies will populate China’s economy. The reforms may be triggered by capital account pressure. When deflation began in Japan, there was little risk that local money would leave. Hence, Japan went into a spiral of deflation and a strong yen. China’s local money is mobile. As interest rates go down at home but up abroad, a massive outflow is inevitable. That would put pressure on the exchange rate. As international pressure makes it very difficult to devalue, reforms have to unfold to keep money at home.
While financial problems are numerous, China is still on safe ground to undertake dramatic reforms. The labour market is tight despite the economic slowdown, because China’s labour force is declining. Hence, whatever temporary interruption there is in the economy, it won’t lead to widespread social instability.
When China is reformed and has a transparent and market-based financial system, the economy will boom massively. Unlike the situation in the past, this boom will lead to sustainable profits growth. That is the basis for a real bull stock market.
Andy Xie is an independent economist