Knock Down the Great Wall of Secrecy

It induced gulp upon gulp, the big crash of 24 August. Trading screens awash in red are bad enough, but when the source of panic is China, there’s no saying what could happen next. This, after all, is a country that remains so utterly inscrutable, little can be said of its policy or economy with certainty enough to calm nerves. The day’s equity rout began in Shanghai, with the Composite index of its stock market crashing 8.5 per cent. The knock-on impact on other bourses was unusually severe. As hot money fled emerging markets for safety, the BSE Sensex lost 5.9 per cent of its value—a scary 1,624 points. While Indian stocks have staged something of a recovery since, Chinese shares still seem in free fall.

Bad news from the East has been piling up. All this year, the great exporter’s exports have been weak, its manufacturing sector stricken, firms debt ridden and investor confidence wobbly. Even if China’s economy hits its 7 per cent expansion target for the year, it would be its lowest in an entire generation’s memory. But this doesn’t explain why the stock slide that began mid-June in Shanghai has accelerated. The country’s weekend news was about dismal factory data and a move to let pension funds invest up to 30 per cent of their assets in equities. At first glance, the latter would seem positive for stock prices. It’s more money.

But, odd though it sounds, more money may indeed be part of the problem in this odd context: with such little clarity on what the regime is up to, anything that smacks of intervention has begun to backfire on it. That the Mandarin word weiji for ‘crisis’ has two syllables, one for ‘danger’ and the other for ‘opportunity’, is all very good as far as sayings go, but investors need real reforms as a response, not the show that’s playing.

China’s central bank has eased money supply to contain panic after Monday’s crash, but it has also turned the yuan a bit softer in the bargain. Its devaluation of 11 August has already left observers confused whether this was a desperate ploy to prop up exports or—as claimed—a move to let the currency float. For about ten years, there have been sporadic signs of the yuan being set free to bob up and down, but the policy hasn’t really got going.

Is China-in-crisis trying to free markets or shackle them? Few can tell. Just a fortnight earlier, the regime’s clumsy efforts to keep stock prices up after their big 27 July fall appeared as heavy handed as could be: it imposed sales clamps, directed state-run firms to buy shares and pumped in big bucks. ‘The bailout is mostly a confidence game,’ wrote economist Andy Xie in mid-August, ‘There is no transparency about how much money the government has actually poured in.’ Share values were still over-inflated, he warned. ‘What’s not real will never become so; no amount of propaganda can change that.’

Having tom-tommed share ownership by the proletariat since mid-2014, the regime must have figured it had to keep prices up. Even after the latest crash, the Shanghai Composite is significantly higher than it was a year ago, and its average price-earnings ratio remains a fantasy figure. As a rule of thumb, a PE ratio beyond 19 or so can be justified only if one expects exponential earnings in the years ahead. A company share is not a casino chip, it’s a claim to a slice of that. A ratio of 19, for example, means one pays $19 for a dollar of next year’s rake-in. Given the growth woes, Chinese stocks on this metric have looked out of touch with reality for a year now.

The way out would be to get real on real value, not push indices around to retain popularity on false promises. Yet, China is China. It makes up 15 per cent of the global economy, tends to craft policy in secrecy, and ends up rattling the rest of the world with all sorts of arbitrary action. If its slump worsens, how the regime manages the fallout—on mass approval, for example—would determine how nervy global investors get. Its currency policy alone could alter world trade in ways that no emerging market would escape.

India is left vulnerable not only because of the stock market jitters—Foreign Institutional Investors have been selling while domestic funds go on a bargain hunt—but also on the external front. Thankfully, India’s domestic economy is stable, with its macro indicators on the mend. Also, the RBI has assured Indians that it would use its dollar reserves to keep a lid on excessive rupee volatility.

All the same, further global shocks could hurt. For everyone’s sake and its own, China had better open up and spell out its game.

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