Stock volatility undermines China’s reform agenda
The combination of China’s crackdown on technology companies, its zero-Covid strategy and its domestic property crisis have buffeted Chinese stocks this year. In order for sentiment to stabilize and for the economy to develop, reforms are needed urgently, putting more emphasis on the private sector and less on GDP growth.
When Xi Jinping became president of China a decade ago, he vowed to raise the nation’s economic game by allowing market forces to influence decision-making. But as 2022 rolls on, it is clear this economic philosophy, dubbed Xiconomics, has not gone to plan, at least as far as local and global investors are concerned.
The volatility in Chinese stocks in the early summer is part of a global correction, one driven by surging inflation, pandemic-related disruptions and geopolitical turmoil. But Chinese shares were underwater long before Russian tanks veered into Ukraine or the US Federal Reserve realized it was behind the curve on taming the worst US inflation in 40 years.
The main reason for this turmoil, say China-based finance experts, is that the government has expanded the role of the state, rather than supersizing the private sector.
“Chinese stock markets are so speculative and consequently so volatile because fundamental investors still don't have the tools they need to make long-term investment decisions,” Michael Pettis, a long-time China resident and a professor of finance at Peking University, tells Asiamoney.
Fundamental investors still don’t have the tools they need to make long-term investment decisions
Pettis speaks for many when he warns that the “quality of economic data is poor, financial statements are questionable, the corporate governance framework is confusing, the rules of the game keep changing, and credit allocation is highly politicized.