The Long Game
Historically, empires built quickly crash at an even greater speed. Fast forward from Athens’s golden age to the grandiose Napoleonic era to modern New York. All prime examples of remarkable growth that lead to a historic downfall. Similarly, in the past 20 years, China has riotously become a new industrialized empire with a strong government to match. The key to the new booming economy however is that its growth is slowing, and heavy investment in the real estate market has caused concern regarding a bubble burst. However, the Chinese Communist Party’s new outlook on state owned enterprises will enable them to overcome opposition to liberalization reforms and therefore handle the bursting of the real estate bubble and slowing economic growth.
In an effort to avoid the bursting of the real estate market bubble, the party is moving investors away from real estate and towards a future in stock market. In an article for Bloomberg Business, Enda Curran discusses the Communist Party’s need to reinvent the way the economy functions to maintain growth. “Chinese officialdom has little choice but to tap on the brakes of the old-line economy. Years of politically driven investment with diminishing returns led to too much debt and industrial overcapacity, as well as ghost towns with unfinished hotels and unoccupied residential towers” (The Major Paradox at the Heart of the Chinese Economy) Curran sheds light on ‘ghost towns’ present throughout China, which are solely used for economic investment. Moreover, she echoes the sentiments of many who see these towns as a warning of the bursting bubble. Her emphasis on China’s need to move away from an economy with diminishing returns promotes the risks of an increasing debt ceiling. In early 2014, 60 minutes reported the same issues discussed in Curran’s article regarding the real estate market and its effect on the economy.
With a need to move towards new industries to avoid the issues brought by ‘ghost towns’, the Communist Party has pushed investors towards the stock market in an effort to boost the slowing Chinese economy. The Economist article ‘The Bubble Question’ introduces the relationship between the stock market and the economy as the Chinese government pushes for more investment. “Between 2010 and early 2014, when China boasted the world’s fastest-growing economy, its stock market was consistently among the world’s worst performers. Since July of last year, this relationship has flipped. Whereas China’s growth has drifted steadily lower, its shares indices have double in value” (The Bubble Question) The government’s shift towards a newly developing stock market invites a new wave of investors in an effort to push economic growth forward. By turning towards the stock market and away from the traditional economy the Chinese Communist Party is therefore creating an opportunity for an increased economic growth rate.
By enticing investors to invest in the newly booming stock market, the Chinese government helps pump money into a slowing economy. The Bloomberg Business article ‘The Major Paradox at the Heart of the Chinese Economy’, discusses the possible lack of visible results in statistical numbers as the economy changes course. “’China’s economy is in a very critical period of restructuring,’ said Zhang Bin, a senior fellow at the Chinese Academy of Social Sciences in Beijing. And there will be economic pain as the government pushes through overdue structural reforms” (The Major Paradox at the Heart of the Chinese Economy) ‘Economic pain’ will likely result in a continual slowing of visible growth as the party chooses different paths for economic expansion. However, once structural reforms have been resolved, new investment will boost economic growth. The key to a new innovative economy is the continual economic support from the stock market as described in Bloomberg Business. “Xi and Premier Li Keqiang are trying to defuse that debt bomb, rein in banks and local governments and promote the nation’s stock markets as a primary way for innovative and smaller companies to raise capital” (The Major Paradox at the Heart of the Chinese Economy) China’s amounting debt is a growing issue blocking the way for economic growth, and the opportunity for smaller companies to receive loans from state-owned banks. The stock market, however, has proven its capability in providing broader financial stability, and in creating a more equal relationship between its success and the success of the economy. “With a big jump in borrowing to buy shares, the stock market is beginning to affect broader financial stability. China needs to develop more mature capital markets so that firms can raise more money directly from investors, taking some of the burden away from banks” (Skyward March) A ‘directly from investors’ approach provides an opportunity for a more liberalized form of market where the people have a say in the returns of their investments and economic cash flow. This new point of view allows the lower middle class to gain access to a better income and way of life.
Even with flexibility regarding a more liberalized market, the Communist Party still controls many developing sectors of the economy. Bloomberg Business article ‘The Major Paradox at the Heart of the Chinese Economy’, depicts a China in a high-risk high reward game of balance as the economy changes course. “China is in the midst of an ambitious and risky, rebalancing act – away from its old growth model of credit-fueled, investment-led and export-powered growth that astounded the world with 10 percent annual average GDP gains from 1980 to 2012” (The Major Paradox at the Heart of the Chinese Economy) The trickiness of such an important balance is emphasized as large companies begin to monopolize certain industries. A shift in the wrong direction could have drastic consequences for the elite of the Communist Party as well as the upper class, who have garnered increased revenue in recent years.
China’s growing demand for energy enables increased wealth of an elite few primarily concentrated in the booming oil sector.
The digital image taken from the Wall Street Journal’s article ‘China’s Frugal Oil Companies’ taken of an oil rig off China’s coast portrays China’s growing demand for energy recourses such as oil. The countries’ energy consumption will be an important factor in shaping the future economy. In an article published by The Wall Street Journal, Li Xin sheds light on the ‘petroleum clique’ who monopolize the oil industry. He writes, “Although they [Chinese big three oil companies] are backed by state-owned banks, their pockets are not unlimited and the debt-to-asset ration is something management has started to worry about” (China’s Frugal Oil Companies) Since its formation, the ‘petroleum clique’ has posed as a threat to the power of the Communist Party and high ranking party officials in charge of the state owned banks that supply the oil industry with cash flow. The article ‘The Chinese Oil Sector: Beijing’s Latest Anti-Corruption Target’ in the Stratfor magazine discusses the clique’s connections in the government. “The political connections it [‘the petroleum clique’] created enabled officials from the oil industry to occupy influential government positions, through which they could shape public policy and resist Beijing’s attempts for control” (The Chinese Oil Sector: Beijing’s Latest Anti-Corruption Target) Therefore, the threat of a few powerful elite members of monopolized industries has had definite impact on government policies, and will shape the expanding economy in the future.
The Chinese Communist Party’s growing concern with wealthy and powerful elite have prompted a slew of anti-corruption campaigns lead by President Xi Jinping since 2011. The article ‘The Chinese Oil Sector: Beijing’s Latest Anti-Corruption Target’ suggests that “The anti-corruption drive has proved to be a useful tool the new administration can wield to achieve its political and economic priorities, particularly as the leadership consolidates power” (The Chinese Oil Sector: Beijing’s Latest Anti-Corruption Target) The tactic to rebalance power in China has historically been used in the Yan’an Rectification Movement in the 1940s introduced by Mao Zedong as a way to improve the function of the state. Proven to be a useful tool, President Xi Jinping’s use of anti-corruption campaigns has helped reinstate control to the Chinese government. Moreover, the anti-corruption campaigns have also been useful in cycling party leaders to help with the economic shift as described by the Stratfor article. “As part of the Communist Party’s anti-corruption drive, the investigation into the company will help new party leaders reassert authority in an industry beset by massive inefficiencies and vested bureaucratic interests – even as they allay public concern over government malfeasance” (The Chinese Oil Sector: Beijing’s Latest Anti-Corruption Target) As the government reasserts authority over monopolized sectors of the economy, the government gains popularity with the public. Moreover, a greater control of the state throughout all sectors leaves room for the party to meet China’s economic goals throughout all industries.
Even with greater control in monopolized industries, the party’s search for solutions to maintain constant economic growth has turned towards liberalizing interest rates. The Wall Street Journal’s article ‘Interest Rate Liberalization – With Chinese Characteristics’ provides insight into a government working towards a more liberalized economy while still trying to maintain control over certain industries. “As part of an effort to open up the Chinese economy, the central bank has said it wants to do away with its controls on domestic interest rates - and it might even complete the ambitious task this year” (Interest Rate Liberalization – With Chinese Characteristics) Newly liberalized interest rates provide an important opportunity for the middle class to benefit from economic growth. By giving all classes access to steadier cash flow with less government control, the party is expanding the small business sector, which in turn, boosts the slowing economy. In addition, increasing money flow has advantages beyond following China’s economic growth plan. It generates important consequences for the Communist party and the global economy. “One guess is that interest rate liberalization paves the way for the Yuan’s future as a global reserve currency – a long-sought goal of Chinese policy makers” (Interest Rate Liberalization – With Chinese Characteristics) The globalization of the Yuan is an important step for the government to take in liberalizing certain industries including the stock market. Taking part in the global economy will enable China to maintain a high economic growth rate, and allow small businesses to develop nationally and overseas.
As the government begins to liberalize interest rates, they are also expanding the gross profit margin of the stock market. As discussed in ‘The Major Paradox at the Heart of the Chinese Economy’, the new cross-border investment between the Shanghai and Hong Kong stock markets is a promising step towards further liberalization. “A big catalyst for the stock market boom this year has been the creation of a new cross-border investment channel called the Shanghai-Hong Kong Stock Connect that allows investors in Hong Kong and China to trade a specified rage of listed stocks in each other’s markets” (The Major Paradox at the Heart of the Chinese Economy) The party’s investment in the continual growth of the economy is an important factor to consider in the liberalization of stocks on a global level. For now, the Shanghai-Hong Kong Connect expansion is a step in liberalizing the stock market nationally, which enables homegrown companies to further develop. The digital image from The Economist article ‘The Bubble Question’ sheds light on the access given to lower and middle classes, and the opportunities provided by having a safe way to invest. Moreover, the image reflects the stock market as a necessary tool for the people of China as well as for the party and government to achieve a higher income and national economic growth rate.
Digital image from The Economist article ‘The Bubble Question’
In the long term, however, China’s expansion into a growing stock market comes with its own fair share of problems, which need to be solved with new economic reforms. “The long game is to transform China’s $10.4 trillion economy into a more sustainable one, featuring a vibrant service sector and a more diversified finance industry that doesn’t rely so heavily on state-owned banks to allocate capital” (The Major Paradox at the Heart of the Chinese Economy) Therefore, the stock market provides an opportunity for a future ‘self-reliant’ China. However, a push away from state-owned banks is an important solution in the party’s hope to reduce corruption and debt. Although the world would like to see a fully liberalized stock market, a controlled liberalization is a more realistic approach for the party to take.
The Chinese Communist Party’s new outlook on state owned enterprises and the booming stock market will enable them to overcome opposition regarding liberalization reforms and therefore handle the slowing economic growth and avoid the bursting of the real estate bubble. The party’s move away from the real estate market and towards the stock market is a promising change in maintaining constant economic growth. Moreover, the expansion of the stock market helps avoid future issues such as a rising debt ceiling, and promotes a more innovative economy with a greater number of “made in China” companies. In addition, the expansion of the stock market with the Shanghai-Hong Kong Connect provides an opportunity for the people of China to gain increased revenue. In turn, a new wave of upper middle class and upper class investors will enter the economic cycle, and help reduce the continual monopolization of certain industries as well as the elite controllers of those companies. By historical precedent, however, a realistic national and global investor will understand that the party will maintain control over the economy as a whole, and will be continually involved in economic reforms to ensure a successful growth rate as sectors such as the stock market expand.
Images, Getty. Digital image. The Economist. 14 Apr. 2015. Web.
Reuters. Oil Rigs off China's Coast. Digital image. ChinaRealTime. 21 May 2015. Web.
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Xin, Li. "China’s Frugal Oil Companies." China Real Time Report RSS. Wall Street Journal, 21 May 2015. Web. 21 May 2015.
Zhu, Grace. "Interest Rate Liberalization — With Chinese Characteristics." China Real Time Report RSS. Wall Street Journal, 18 May 2015. Web. 21 May 2015.