Mr Qi may require a massage, but China's growth figures don't

Investors in the Shanghai stock market have had a stressful week, but the country’s future is still bright

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The Independent Online

Spare a thought, if you will, for a Mr Qi, of China. He invested some £100,000 in shares in May, just before the stock-market bubble burst. He has lost £40,000, at least on paper. His dreams of making enough on the stock market are, for now, dashed, and he will have to postpone his plan to buy his own home. I do not know what the Mandarin for “negative equity” is, but Mr Qi is feeling the effects of it, as are many more Chinese private investors. Reports tell us that the only way Mr Qi can find some relief from the stress is to have a good old-fashioned foot massage. There will be a good deal of foot-rubbing going on in China right now.

Hopefully, an awful lot of quick learning will be taking place as well. For example, even the most modest investor in the West should be aware of “pound cost averaging”, a forbidding term which merely means that you do not shove all your cash into shares in one go, for reasons that are now obvious, but rather drip-feed it month by month, say, and into a broad-based investment vehicle rather than, for instance, half a dozen highly speculative shares (I may be being unfair to Mr Qi there, but you take the point).

The point is that the Chinese equity market is unusual in being dominated by lots of what we might call “Sids” – small-time punters. In Europe, the United States and Japan, markets are dominated by big investors – pension funds and their managers, life assurers, hedge funds, you name it. Firms with a large base of individual shareholders are usually ones that were privatised or demutualised, such as BT, Royal Mail or Aviva (formerly Norwich Union), and very unusual. But in China a huge army of rather inexperienced investors has taken a chance on the stock market, and had a violent initiation into the old adage that past returns may not be any guide to the future.

Let’s not be patronising, though. After the Mao experiment – a disaster in every way except for restoring the nation’s independence – China really only rejoined the world economy in the 1990s. Its recent experience of capitalism is, then, just that: short, as well as sometimes sweet and sometimes sour. Investors, the Chinese authorities and its people in general are discovering what it means to follow the path to free(er) markets and greater inequality. As well as lifting many millions out of poverty – and, with similar developments in India and other populous emerging economies, contributing to a worldwide reduction in inequality – China has also become more unequal, with its fair share of billionaires. It creates obvious strains in a nominally uncorrupted “communist” state. 

In the past few weeks the Chinese authorities, too, have re-learned another old saw – that there is no way you can “buck the market” by forcing Chinese pension funds to pour savings into doomed shares. The People’s Bank of China has fallen back on more conventional techniques: devaluing the currency, cutting interest rates, and easing restrictions on bank lending. All very familiar to us.

So, every economy goes through these sort of growing pains, and, indeed, these never stop. In the 1990s and 2000s, we in the West forgot many of the lessons hard-learned in the previous century about the inherent riskiness of banks, easing regulations about investment banking in particular, and allowing our venerable building societies and their US equivalents, the “thrifts”, to start buying what turned out to be toxic bonds. Having seen British banks reach such a nadir in 2008 that they were within hours of having to stop the cash machines operating, we have nothing to feel smug about. Even since then we have somehow managed to allow a drug-addled Methodist minister to become boss of the Co-operative Bank. And look at Greece. As I say, let’s not be too smug.

We also need a sense of historical perspective – the longer the better. As recently as the 17th century (I jest, but there is a serious point here), China had the largest, most advanced economy in the world, with the technology to match: some eight times larger than Britain’s (admittedly, China having a vast population). Even in 1870, China was No 1. Whatever the Shanghai stock market does, the story of China’s growth is formidable, and its economy is likely to overtake that of the US in a couple of decades. All those joint ventures with Western car-makers, drinks firms, engineers and electronics firms will yield the same transference of know-how as they did for Japan in the 1950s. China will move from making knock-offs to world-leading technologies, as South Korea did. As with those economies’ success, they will add to the prosperity of the whole world. That is good for everyone, including Mr Qi.

Hamish McRae is away

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