More informed people than me can, and have, painted crisp pictures of the regulatory chaos currently unfolding in China. The latest is an excellent article in the Wall Street Journal today, “China’s Response to Stock Rout Exposes Disarray,” that is well worth your time if you do business there.
The most telling comment, according to the article, something said by premier Li Keqiang at an emergency meeting of finance and economic officials on July 4. Li gathered all his minions together and then ordered: “I want stronger measures to rescue the market.”
Take that sentence at its exact face value. Li didn’t say he wanted a fair stock market, or one that functions, or is transparent, or even just works in a predictable way. He wanted the Chinese government to push stock prices back to their nosebleed levels of earlier this year, period.
The Chinese government has deep, powerful urges to behave that way. The grand bargain, after all, is that the Chinese people relinquish freedom to the Communist Party in exchange for social and economic stability. Li, 60 years old, was a teen-ager during the Cultural Revolution, and like all of his peers running the country in Beijing, his paramount concern is to prevent another collapse of social order like he’s seen before. So of course he’s going to order the bureaucracy to prop up stock prices.
Here’s the thing: those bureaucrats don’t know what they’re doing.
We can’t fault them for that inexperience too much. Hell, American officials collectively didn’t know much more when chaos struck our markets in 2008, and these Chinese officials are the first generation to run a passably modern capital market system in China.
Fundamentally, however, we have hastily constructed stock markets in Shanghai and Shenzhen, collapsing under plenty of fraudulent accounting from the listed companies there, suddenly over-managed by untested bureaucrats, whose incentive is to protect privilege and party more than to build fair and working stock exchanges. Hence this hoi polloi of regulatory moves—some contradictory, many fruitless—all geared simply to push stock prices back to a point where the Chinese middle class won’t bother to push back against the ruling class.
Think about that the next time you want to complain about the U.S. regulatory regime. Think about that the next time you say China is preparing to eat our lunch in the future. China is lucky simply to be where it is, and will be even luckier if it manages to stay there.