China’s financial communism shoved off by market forces

The Shanghai Composite Index plunged 8.48 percent on Monday, the biggest daily decline in eight years and five months. On Tuesday, the index fell another 1.68 percent. The closing price, at 3663.00, represented a 30 percent drop from June 12’s peak of 5,178.19. Since last year, China’s stock markets have been breaking new highs. With the world’s second largest economy suffering from plunging markets, global stock markets also declined, from Hong Kong and Taiwan, to the U.S., Germany, France and the U.K. In Korea, both the main stock index KOSPI and tech-heavy KOSDAQ remained unstable for two days. Some critics warn a global economic crisis originating from China, similar to the global financial crisis in 2008.

The falling Chinese stock markets are caused by various reasons, including a U.S. rate hike, strengthening U.S. dollar and slowing Chinese economy. However, the more fundamental reason is that stock prices have increased too fast compared to economic fundamentals. Criticism is rising that China’s communist financial policy that had encouraged stock investment to prop up domestic demand is worsening the situation. Critics claim that as the Chinese government adopted stop-gap measures and intervened extremely in the markets, side effects are emerging. U.S. media Bloomberg said Chinese stock markets are no longer a true market and that they have degenerated into a (stock trading) system.

The government poured into the economy some 40 measures in the past month to prop up the stock markets. It mobilized state-owned banks to pump money into the economy, and suspended transactions of more than 1,400 stock items. Such measures would have been hard to imagine in other countries. Helped by the government’s policies, the Shanghai Composite Index rebounded 16 percent through last weekend, but plunged again this week. Critics say that in a fight between market forces and the communist hegemony, the government is being shoved off.

There are also suspicions that China is manipulating data. The New York Times recently reported that China’s local governments are exaggerating corporate sales and tax revenue figures. On July 15 when the government announced that Chinese economy grew 7 percent, speculation rose whether there was government manipulation. The biggest risk to the Chinese economy is distrust in the government and capital markets. China’s current stock markets are a proof that measures that go against market forces fail.