China's tumbling stock markets: Will the country need the 'wet nurse' again?

Beijing has insisted it will not rescue China's tumbling stock markets with liquidity injections. But analysts are unsure whether to believe the promise

One of China's national emblems is the Giant Panda. But a rather less appealing variety of bear is now stalking the Middle Kingdom. The value of the Shanghai Stock Exchange is down by around a fifth since its February peak. A rapid fall of such a magnitude fits one of the usual definitions of a bear market.

The proximate cause of this market strife has been a vicious spike in inter-bank lending rates in recent weeks.

When this sort of financial stress has emerged in the past the Chinese central bank has rushed to the rescue with buckets full of short-term liquidity in order to preserve stability. But the monetary authority has been sitting on its hands this time around.

The People's Daily newspaper, which is understood to have close links to the Communist leadership, wrote in an editorial early yesterday that it was not the job of the central bank to play "wet nurse" to the stock exchange by providing liquidity to banks and other financial institutions that have over-stretched themselves in recent years.

Well, up to a point. The People's Bank of China did yesterday belatedly attempt to calm things down by releasing a statement pledging to help distressed financial institutions if absolutely necessary. "If banks have temporary shortages in their planned funding, the central bank will give them liquidity support," it said.

"If institutions have problems in managing their liquidity, the central bank will apply appropriate measures under the circumstances to maintain the overall stability of money markets." The central bank also added that it had already provided support to some banks, although it did not name the institutions in question.

So will more overt and comprehensive forms of help from the authorities be forthcoming to quell the storms and restore confidence to investors in the world's second largest economy? Analysts are divided. Some see recent events as a sign that the Beijing authorities are acting on their promises to wean China off its reliance on investment spending, fuelled by cheap credit, and to rebalance the economy towards more sustainable sources of growth. The introduction of some painful market disciplines on weak lenders, particularly those operating in the shadow banking sector, in this analysis, is the necessary first step.

"The episode is arguably the strongest sign yet that the leadership is willing to suffer short-term economic pain if necessary to achieve more sustainable growth" argues Mark Williams of Capital Economics.

"What the market is fearing is that the government and the People's Bank of China want to really continue with the reforms and a lot of the smaller companies, smaller banks may not survive," said Daphne Roth of ABN Amro Private Bank.

But Christian Schulz of Berenberg Bank feels the authorities would probably step in much sooner, rather than later, to avert any scenario in which unemployment would rise and unrest could potentially threaten the regime. "While it is convinced of the salutary effects of tougher policy, China is also unlikely to risk a serious financial crisis" he said. In other words, expect the wet nurse to return promptly if things look like they could get truly ugly.

Kathleen Brooks of Forex.com said that yesterday's statement from the People's Bank showed that the authorities had already effectively caved in. "China is starting to look less like Europe's Angela Merkel and a bit more like the Fed, always at the ready with a life-saving injection of liquidity" she said.

In truth given the traditional opacity of the Beijing regime no one can be sure. It is perfectly possible that Xi Jinping's relatively new administration is divided about how to proceed. But the greatest mistake that an outsider could make, as this high-stakes drama plays out, is to assume that China's economy runs by similar rules as those in Europe or America.

The truth is that they are worlds apart. China's economy is dominated by state-owned enterprises, at least 30 per cent of firms are ultimately controlled by the government.

This is true of those listed on the Shanghai Stock market. The wider Chinese economy is still largely closed. Beijing retains capital controls, which limits the amount of money that can flow in an out of the country.

This, combined with controls over interest rates, means the authorities can effectively mobilise its population's savings to make cheap loans to industry and pump up growth impressively. That is how China has largely expanded its economy since the global financial crisis. Even if the administration in Beijing is determined to shift away from this unsustainable model, it will be extremely difficult given the number of vested interests who benefit from it.

We have an interest in how all this plays out. China is projected by the International Monetary Fund to provide the biggest single contribution to global growth in 2013.

If the Chinese motor fails, we will all feel the impact.

Difficult to see who calls the shots in China

The uncertainty about how Beijing will respond to the market turmoil is compounded by the fact that it is often difficult to see who is calling the shots. Interest rate decisions are made by the State Council, rather than the People's Bank of China.

The People's Bank used to control commercial banks' reserve requirements, but those powers now seem to have been transferred. The State Council, the equivalent of the Cabinet, also seems to have authority over managing market liquidity.

To understand decisions, investors have to pay regard not only to the statements from the central bank, but also official mouthpieces such as the People's Daily and the Xinhua news agency.

Ben Chu's 'Chinese Whispers: Why everything You've Heard About China is Wrong' is published in October by Weidenfeld & Nicolson

Sport
premier leagueLive: All the latest news and scores from today's matches
News
politics
News
newsMcKamey Manor says 'there is no escape until the tour is completed'
News
The clocks go forward an hour at 1am on Sunday 30 March
news
PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Sport
Luis Suarez and Lionel Messi during Barcelona training in August
footballPete Jenson co-ghost wrote Suarez’s autobiography and reveals how desperate he's been to return
Money
Welcome to tinsel town: retailers such as Selfridges will be Santa's little helpers this Christmas, working hard to persuade shoppers to stock up on gifts
news
Arts and Entertainment
Soul singer Sam Smith cleared up at the Mobo awards this week
newsSam Smith’s Mobo triumph is just the latest example of a trend
News
Laurence Easeman and Russell Brand
people
Sport
Fans of Dulwich Hamlet FC at their ground Champion Hill
footballFans are rejecting the £2,000 season tickets, officious stewarding, and airline-stadium sponsorship
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Compensation and Benefits Manager - Brentwood - Circa £60,000

£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...

Data Analyst/Planning and Performance – Surrey – Up to £35k

£30000 - £35000 Per Annum plus excellent benefits: Clearwater People Solutions...

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Markit EDM (CADIS) Developer

£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

Day In a Page

Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

Wilko Johnson, now the bad news

Former Dr Feelgood splits with manager after police investigate assault claims
Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

Mark Udall: The Democrat Senator with a fight on his hands

The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
New discoveries show more contact between far-flung prehistoric humans than had been thought

New discoveries show more contact between far-flung prehistoric humans than had been thought

Evidence found of contact between Easter Islanders and South America
Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

Cerys Matthews on Dylan Thomas

The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
DIY is not fun and we've finally realised this as a nation

Homebase closures: 'DIY is not fun'

Homebase has announced the closure of one in four of its stores. Nick Harding, who never did know his awl from his elbow, is glad to see the back of DIY
The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

Air New Zealand's wizard in-flight video

The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
Pumpkin spice is the flavour of the month - but can you stomach the sweetness?

Pumpkin spice is the flavour of the month

The combination of cinnamon, clove, nutmeg (and no actual pumpkin), now flavours everything from lattes to cream cheese in the US
11 best sonic skincare brushes

11 best sonic skincare brushes

Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
Paul Scholes column: I'm not worried about Manchester United's defence - Chelsea test can be the making of Phil Jones and Marcos Rojo

Paul Scholes column

I'm not worried about Manchester United's defence - Chelsea test can be the making of Jones and Rojo
Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

While other sports are stalked by corruption, we are an easy target for the critics
Jamie Roberts exclusive interview: 'I'm a man of my word – I'll stay in Paris'

Jamie Roberts: 'I'm a man of my word – I'll stay in Paris'

Wales centre says he’s not coming home but is looking to establish himself at Racing Métro
How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker