Hold the applause for Xi’s financial ‘National Team’
China’s Olympians may be getting the headlines. But the more important force for the nation’s global standing is the “National Team” dominating the mainland stock game.
This gang, also sometimes called the “plunge protection team,” dates back to mid-2015 when the Shanghai Composite Index plunged at double-digit rates.
This collection of state-backed institutional investors arranged by President Xi Jinping’s government emerges from time to time to stabilize share prices. On at least seven occasions since then, it’s raced to the rescue.
For decades, it’s been a maxim among traders that you don’t fight a central bank. In China, speculators know better than to test Beijing’s plunge protection team. All things equal, it’s best not to get in this fire brigade’s way.
This team, as Deutsche Bank AG analyst Michael Tong puts it, “usually steps in to act as a market stabilizer when the stock market experiences a rapid and sharp correction, or during politically sensitive periods.”
Suffice to say, this is one of those sensitive moments. Aside from the ongoing Winter Olympics in Beijing, 2022 is the year Xi plans to secure an unprecedented third term as Communist Party leader. New shockwaves akin to those in 2015 emanating from Shanghai are the last thing Xi’s inner circle wants.
So far, the National Team’s apparent intervention has done the trick. That, and news on Wednesday that Japan’s SoftBank Group has no immediate plans to dump its stake in Alibaba Group, as markets feared. For now, at least.
Deutsche Bank reckons that the 21 institutions thought to be involved in National Team maneuvers have a collective $145 billion worth of firepower to aim at chaotic markets. Tong notes that price moves in categories of blue-chip stocks the protection team typically favors suggest it’s been active “either directly or indirectly over the past few weeks.”
Yet this gets at an important paradox: if these periodic interventions work, why are they still necessary in year 10 of the Xi era?
Given China’s growth trajectory, JPMorgan Chase strategist Mixo Das speaks for many when saying that “within Asia, if you just follow policy, China is definitely the place to be.”
There’s growing optimism, too, that Xi’s government is recalibrating Covid-19 policies in ways that avoid growth-killing lockdowns.
“Chinese public health officials have repeatedly reiterated that ‘dynamic clearing’ is the best way to balance Covid control and the domestic economy,” says analyst Ernan Cui at Gavekal Research. “They are confident it can avoid large-scale outbreaks, and consider the economic costs manageable.”
The good news, of course, is that the bear-market signals emanating from Shanghai today aren’t as dire as in the summer of 2015. Back then, Chinese shares fell more than 30% in a matter of weeks. The precipitous declines slammed bourses from Tokyo to London to New York and fueled contagion fears.
Team Xi sprung to action. It took steps to loosen rules on leverage and reduce reserve requirements; delay all initial public offerings; suspend trading in thousands of listed companies and; allow mainlanders to use apartments as collateral to buy shares. Xi’s men even lobbied households to buy the market out of patriotism.
The current bear market is different. It’s partly about concerns about the economic outlook, partly about the fallout from Xi’s clampdowns on the tech, property and education sectors.
The latter dynamic explains why investors worry SoftBank founder Masayoshi Son might pull the plug on his roughly 25% stake in Jack Ma’s Alibaba juggernaut. With Alibaba shares down 60% since late 2020, it’s not surprising Son might indeed be searching for an exit.
Xi’s deleveraging policies, meantime, helped push property developers like China Evergrande Group into default. The shockwaves hit Fantasia Holdings and Kaisa Group and pushed other highly-indebted companies toward the rocks.
Yet with the economy set to grow north of 5% this year and the People’s Bank of China easing, the selloff seems driven more by foundational questions about the financial system than short-term risks. Xi, in other words, isn’t delivering fast enough on pledges to create a more vibrant and productive private sector.
And that is making for some global dynamics Beijing might not like, notes portfolio manager Michael Gayed, who publishes the Lead-Lag Report newsletter. “While China’s stock market and the wider MSCI Emerging Markets have both dropped since the beginning of 2021,” he observes, “India’s stock market has risen 23%.” That “has attracted increasing numbers” of retail investors.
When Xi took power in 2012, he promised to let market forces play a “decisive” role in economic decision-making.
The centerpiece of Xi’s desire to take China upmarket is his “Made in China 2025” extravaganza. It’s Xi’s plan to dominate the future of artificial intelligence, biotechnology, engineering, renewable energy, self-driving vehicles, semiconductors and software.
Too often, though, Xi’s reform team has put the proverbial cart before the horse. Team Xi has tended to over-promise and under-deliver financial upgrade-wise.
In the years since the market chaos of 2015, China opened equity markets ever wider to overseas investors, steadily increasing quotas for foreign funds. Beijing did the same with government bonds, which have since been added to benchmarks like FTSE-Russell.
Yet access to exchanges in Shanghai and Shenzhen often outpace reforms needed to prepare China Inc for the global prime time.
To be sure, China has often succeeded by using its own playbook. Back in 1997-98, when developing Asia crashed, China opted against devaluing the yuan.
Several times since the late 1990s, traders and analysts predicted a credit-and-debt-fueled crash. Speculators pounced. But each time, China confounded the naysayers.
Whether China can beat the odds again depends on Xi’s ability to earn investors’ trust. As Chinese stocks are reminding us, there are certain laws of gravity that still apply to economies transitioning from state-driven and export-led growth to services, innovation and domestic consumption.
One law Xi discarded at Beijing’s peril is that developing economies should build credible and trusted markets before trillions of dollars of capital arrive.
That means methodically increasing transparency, ensuring companies raise their corporate governance games, building reliable surveillance mechanisms like trusted credit rating companies and erecting a robust market infrastructure before the influx of foreign capital.
It also requires a freer media. One of the most troubling realities about the current Olympics is how much less freedom the press enjoys than in 2008, the last time Beijing hosted the Games.
In recent months, Xi intensified his anti-corruption drive. He pledged to show “no mercy” in rooting out rent-seeking behavior. Yet an aggressive and unfettered media would be a natural ally in policing malfeasance that warps economic incentives and squanders the benefits of rapid gross domestic product growth.
Instead, censorship efforts have intensified at home and put Hong Kong’s autonomy at risk, too. Since 2012, China has become even more of a black box for investors, corporate executives and governments everywhere.
Paradoxically, Xi also has worked to increase China’s footprint as a global innovation center. In October 2020, amid the worst of the Covid-19 crisis, Xi unveiled the ginormous special enterprise zone he’s creating centered around the greater Shenzhen area.
It made perfect sense to put the city at the very center of the enterprise. Forty years ago, Shenzhen was China’s laboratory for trade, industrialization and economic engagement with a fast-changing world.
Now Shenzhen is emblematic of Xi’s commitment to “opening up and reforming” Asia’s biggest economy. As Xi says of the Shenzhen-centric project: “We need to unswervingly implement an innovation-driven strategy to foster new engines and new trends so as to build a technological innovation high-ground with global influence.”
Yet this also requires unswervingly allowing innovators freer modes of communication and information flows. And greater transparency about where the boundaries and risks lie.
It’s a problem, for example, that the global media paid more attention to Ma’s marginalization since late 2020 than the tech ecosystem China has been building since then.
For the most vocal critics of Xi’s priorities – from George Soros to Kyle Bass to Jim Chanos – the Ma affair became Exhibit A.
China’s most famous billionaire has gone largely quiet since an October 2020 Shanghai speech where he criticized Xi’s regulators for not understanding the tech industry. Two weeks later, a planned $37 billion initial public offering by Ma’s fintech giant Ant Group was shelved.
Though Team Xi’s denied it was retribution, the fact that what would have been history’s biggest IPO remains in limbo 460 days later continues to confound investors and overshadow the “new economy” rhetoric coming out of a government obsessed with amassing ever greater control over the world’s No 2 economy.
Hence, Xi’s financial National Team is showing up just as Chinese athletes compete in Beijing’s artificial snow. Yet 10 years into the Xi era, it’s arguably high time China whipped its financial system into shape so that its periodic market-propping interventions are no longer necessary.
Author: WILLIAM PESEK, Asia Times