MH Rajesh tries to find an answer in the context of the bear market in China. Healthy stock markets are bell weathers of economy. If the economy is performing well, so will stock markets in perfect conditions. So what is a healthy stock market? Answers are myriad. One explanation is that it is a good institution that unlocks the ‘animal spirits’ as a famous economist PM said once, one that diverts money from people who would have otherwise hoarded gold, or put money in the safe deposits or some other safe, yet lazy vehicles of investments into enterprises and entrepreneurs who do productive activities that can add to the GDP. One that helps the industry to raise finances for their projects… Also one that is not controlled by government other than as a regulator. These are some back- of- the- envelope definitions.
The stock markets cheers good enterprises, boos the bad. It punishes poor performers. Yes, it also is a place where the punters roam. Overall, the stock market is a great idea for any society to keep the money flowing. That’s why just a year after the infamous Tian -an- men incident; the Chinese started its first stock exchange. One knows that there are bulls and bears in the markets. The bulls take the prices high and the bears do the opposite.
The idea of this entry in blog is not to trace the evolution of ‘Chinese Economy’ which is a fairy tale in itself. Every fairy tales has twists and asides. The current fluctuations in the stock market that we are witnessing in China are one such blip, an aside within a fairy tale.
The Chinese stock markets were on a spectacular bullish spree for the past one year. Stocks had tripled from where it was a year ago. According to the Economist, this was called Uncle Xis bull market- a gift from him for the average Chinese to realise the China Dream. There were warning signs of a bubble; however, markets are also about sentiments of fear as well as greed. Chinese are humans too and the greed drove the markets for a long time. Finally it appears that the bears have caught up. The markets are down by 35percent, yet it is 75percent of what it was a year ago says Economist. So it is likely that there is some more distance to go before it reaches the bottom of this pit. However the loss is a notional 3 trillion $, which is 10 times Greece’s GDP!
In a healthy stock market, the state just plays the role of an umpire. However, there have been occasions when state intervenes actively. Chinese Government has now stepped in to reduce interest rate, IPOs have been halted, and buyback schemes have been hatched with blessings of state banks. The slide still continues.
What does all this mean to security? The bursting of this bubble can directly affect economy. People will stop investing in the market. It can slow down several other interrelated economic activities. Banks that have given loan with stocks as collaterals are bound to lose money. It may not affect the Chinese economically as much as US or India, since money invested in stock markets are only a small percentage of GDP. Albeit there is a nuance here.
In a country like America or India, the state can afford people to be ‘’economically unhappy’’. There still is that freedom to stage a rally, criticize a government policy loudly and after a hullabaloo that lasts a few media days, the society moves on cautiously. The effect will be more economic! However the Chinese case could be different. The political system offers little social manoeuvring room. The system hinges overtly on providing good times in lieu of liberty. When the good times don’t happen, people are bound to look at other aspects like liberty, which the Chinese system can ill afford. The fact that China spends more on internal security than external, and that it has a force within the PLA that looks purely at internal matters, says something about society.
Overall it is clear that this bear will worry the Party (CPC) and its country which has just come to terms with a new normal of 7percent after three decades of double digit growth. Knowing the farsightedness China displays, it will now be assessing its next worry, the infamous real estate bubble.
We began with the question regarding stock markets effect on national security is-The answer is -it depends. After all, to the average Chinese the party has the heavens mandate’, and that includes stock markets!