The hapless club
Equities jumped 10 per cent three years ago, when China said it would buy up banking shares in the market. They barely budged after a similar announcement on Monday. The difference is credibility. A sustained financial crisis has shown that governments around the world have a limited ability to make things better. Beijing has a lot of credibility to lose.
The country’s economy has grown at near double-digit rates for decades. China also managed the first wave of the global financial crisis more successfully than most developed countries. In 2008, the stock purchases were followed by a $585-billion fiscal stimulus. GDP growth hardly slowed, despite a sharp drop in exports to developed counties.
But, the Chinese stimulus, like most extreme fiscal and monetary measures, had its downsides. The flood of money encouraged capital misallocation, stimulated property speculation, nurtured shady non-bank lenders and worsened inflation. Now, investors, no longer sure the government is in control, fear more stimulus will only aggravate the financial tensions.
China is a latecomer to the global trend of lost official credibility. After four years of rolling financial crises and disappointing growth in developed countries, it is hard for investors – or voters – to trust any official claim that a healthy order will soon be restored. Developing nations have had fewer economic problems. But, China is following Brazil, which has discouraged foreign capitalists with repeated efforts to control the value of its currency.
The authorities are struggling for two reasons. First, they try to please too many constituencies. Various promises are made to soothe the rich, the poor, businessmen, bankers and foreign investors. They all cannot be kept happy, so everyone feels let down most of the time. Second, the experts are at a loss. No one knows how to deleverage and rebalance economies without tremendous dislocations in trade, investment and employment. The authorities are driving in the dark without headlights.
The lost credibility is a great shame. And, one thing experts do know is that prosperity is harder to maintain when governments are perceived as untrustworthy.