Written by Marcos Margarido – PSTU/Brasil
Thursday, 23 July 2015 15:50
After 12 months of uninterrupted boom of the main Chinese stock exchanges (Shanghai and Shenzhen), that appreciated 147%, it plummeted in only 17 days (between June 12 and July 9) causing a loss of 32%, equivalent to US$ 1.3 trillion on the Shanghai stock exchange, an amount close to the combined market capitalization of Spanish State’s four stock markets. An astonishing loss.
In the twelve months of continuous high, the Chinese government encouraged the purchase of shares providing credit at low interest rates to brokers who lent money to investors to buy shares offered by themselves. Total loans reached US$ 322 billion on May 27, according to Bloomberg. The deal seemed so profitable that it became the main source of income for middle-class families and many left the job to devote themselves exclusively to “bet” on the market.
Farmers said jubilantly it’s easier to make money from stocks than farmwork. And all embarked on the bandwagon, buying shares of small and medium companies, which promised faster gain, but taking bigger risk, always encouraged by the government, which claimed to be a safe deal. The appreciation has reached such a point that the stocks of these companies were worth 147 times their corporate profits, while the average value of this index (the price/earning ratio) in the U.S. is 21. Theoretically, the PER means the number of years in which the investment can be recovered in the form of dividends. But obviously no one was willing to wait that long, and the shares were traded daily.
Fall over the precipice
17 days were enough to put an end in the easy enrichment dreams of millions of Chinese. The drop was not bigger because the government again injected billions of dollars in the form of loans and lower interest rates, and reduced the reserve requirement ratio of banks (to increase the money available for lending), permission for pension funds to invest up to 30% (equivalent to more than $100 billion) of their net assets in equities, among other measures, in addition to the continuous CCP government statements of trust on the “market”.
But despite daily measurements for a week (from June 27), the downward trend of the markets continued, causing panic among the bourgeoisie worldwide. The situation was stabilized only after the government ordered state owned companies to buy its own shares, a true financial suicide. In addition, about a half of China’s listed stocks have stopped trading in an attempt to prevent a further fall.
The cause of the growth …
Many speak of the blow of a speculative bubble. That there was a “bubble” (or virtual capital) there is no doubt. However, there are causes related to “real” economy of China which are the basis of both the growth and the stock market plunge as well.
And the most important basis is the construction industry, which has already been analyzed in previous articles when it said that living an unprecedented overproduction phase.
After years of increasing production of real estate – luxury homes and condominiums, futuristic office buildings and malls – fueled by easy credit given by the government and the consequent rise in prices, sales would be paralyzed. Ghost towns arise everywhere, entire buildings without a single resident, shopping malls with no shops open. Prices start to fall and the golden eggs chicken of the Chinese industry stopped to lay. Profits are no longer attractive, works are unfinished, it’s not worth investing in this sector anymore.
The investment in real estate development rose 5.1% in May compared to May 2014. A significant number, but the lowest since early 2009. Land purchases declined 26% and housing starts decreased by 16%. The investments were mainly to finish already started works.
This fall has a huge weight on the Chinese economy. Some economists estimate that the construction industry – from steel and cement to home appliances and mobile industry – account for more than 20 percent of China’s GDP.
But if there was real estate overproduction, there was also an excess of money in the hands of construction and real estate companies, produced by superprofits during the expansion cycle. That capital, eager to appreciate, looked for shelter on the stock exchanges and has been the cause of their growth in the last 12 months.
… And of the stocks’ plunge
However, a rising stock market would make sense if there was an expansion of economic activity, which is not the case, including the construction sector. According to the IMF, China’s GDP is expected to grow 6.8% in 2015 and 6.3% next year, compared with 7.4% in 2014. The Chinese Central Bank lowered from 7.1% to 7.0% its own growth forecast for this year. Significant numbers, though declining.
In the industrial sector, there is a situation of stagnation. The PMI index, which measures the variation in orders from industries purchasing departments (and thus indicates the possibility of future growth) was 50.2 in June, the same value of May. A PMI at 50 is on the border between contraction and expansion.
Finally, the May data show that imports fell 18% over the same month last year.
It was this situation of China’s economy that caused the stock market to plunge, apart from the speculative race. The rising stocks were not followed by economic growth, not because there was no money to invest, instead, but because there were not sufficiently profitable sectors in which to invest. In this case, investment in stocks becomes attractive, until, without prior announcement, the appreciation is so great that all (or a large group) decide to sell and install panic.
An economy with enormous accumulation of contradictions
At first glance, the Chinese government could prevent – once again – a catastrophic decline of the economy, which could have unimaginable international repercussions, especially for countries that rely on exports to China, such as Brazil or Australia, but also to the U.S. imperialism, which could see its capital invested in the country evaporate.
In addition, it could prevent the current growing wave of strikes, staged for the most varied reasons, to spread and unify around the fight against the government itself, which would be the first step towards the overthrow of the CCP’s dictatorship.
But in neither of the two aspects the last word has been given, because the solution found by the government does not solve the structural problems of the economy – the first being the crisis of overproduction in several sectors related to construction, as the steel industry, cement, real estate etc.
More contradictions are accumulating. First, the release of more loans made by state banks and the reducing interest rates cause the increase of the country’s public debt, which was already 282% of GDP by 2014 (including local governments debts), according to McKinsey.
Second, the mechanism of forcing state companies to buy its own shares to avoid more falls caused these companies to exchange cash for equities that hardly will return to their previous values before the fall. Mainly because, when buying their own equities, companies decapitalize which goes against the equities’ valuation. The trend is to speed up the fall of the “real” economy after these dangerous moves by the government.
The margin for maneuver is shrinking and the American imperialism itself begins to doubt the ability of the Chinese President Xi Jinping to lead to a successful conclusion the current economic crisis and safeguard the interests of its bourgeoisie in the country. The next steps taken by the working class will be decisive.