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China Submits to a Painful Market Reality

China Submits to a Painful Market Reality

Thursday, 17 March, 2022 - 05:15

You can’t buck the market, the late UK Prime Minister Margaret Thatcher famously said. In a different context, US heavyweight boxer Mike Tyson observed that everyone has a plan until they get punched in the mouth. Both were expressing variations of the same principle. Faced with an unopposable force, the only course is to capitulate. And that’s what China’s government just did.

The flurry of assurances emanating from the country’s top financial policy committee Wednesday go beyond the standard official response to a market in freefall: They amount to a significant change in direction. After more than 18 months of pursuing a program that placed the Communist Party’s political objectives ahead of the concerns of investors, the tone has abruptly shifted. China supports overseas listings; the “rectification” of internet platform companies will be wound up soon and regulation will henceforth be transparent and predictable; the imploding real estate sector will get support; policies will be market-friendly and look to safeguard stability.

Hong Kong’s Hang Seng Index surged 9.1%, the most since 2008, while the mainland’s CSI 300 Index climbed 4.3%. The question now is whether this is a dead cat bounce or if it marks the start of a sustainable recovery. The Hong Kong benchmark remains down 14% this year and is trading at close to its lowest multiple of estimated earnings since the global financial crisis. China has a record of botched attempts at market rescues. This time might just be different, if it signals a genuine change of heart over the government’s approach to markets.

Since moving in the second half of 2020 to restrain developer leverage and exert tighter control over technology corporations, President Xi Jinping has appeared to pay markets little heed. Hundreds of billions of dollars were wiped off the value of offshore-listed companies such as Alibaba Group Holding Ltd., Tencent Holdings Ltd. and Meituan last year as the tech crackdown widened. The online education sector was wiped out by government decree almost overnight. Didi Global Inc. was told to delist from the New York Stock Exchange. Most of this arrived with little to no forewarning or explanation, unnerving foreign investors.

As president, Xi has sought to revive core Communist values and reassert the primary role of the state sector in the economy. The government’s tighter grip on tech companies forms part of his “common prosperity” campaign to reduce excesses of wealth and address China’s yawning inequality. It’s an approach that places markets in a distinctly subordinate role to the visible hand of government.

The trouble is, as others before have discovered, markets aren’t always that easy to control. And China still needs them. Officials may have reacted with indifference last year to the evaporation of value at Alibaba and a handful of other internet companies, but everyone has their limit. For Beijing, that moment appears to have arrived Tuesday, when the country’s stocks were hit by a wave of panic-selling driven by the risk of sanctions should China aid Russia in its invasion of Ukraine, combined with the prospect of forced delistings from US markets.

Arguably, China has been unlucky in timing. The Ukraine war was an exogenous risk that was beyond Beijing’s control, and has arrived just as a renewed spike of Covid outbreaks darkens the outlook for the economy. Against that, nobody forced Xi to align so closely with Vladimir Putin just before the Russian president decided to invade. Own goals cannot be denied.

The uncomfortable truth is that trust and confidence in Chinese assets have already been eroded by many months of capricious and opaque policy-making. Wednesday’s statement, which cited top economic official Liu He and didn’t mention Xi, represents a belated recognition that, at least where markets are concerned, China isn’t yet ready to throw off the yoke of Western orthodoxy and dictate its own terms. A course correction is better late than never. Sometimes you just have to roll with the punches.


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