Who to bail out? And who to let fail? Those are questions policy makers round the world have faced repeatedly in recent years.
In China, the leadership’s all-guns-blazing policy response to a stock-market correction shows how its priorities have changed in the campaign to rebalance the world’s No. 2 economy. While rust-belt industries are being allowed to wind down in China’s northeast, officials are micro-managing stock listings and tapping the central bank to arrest a slide in equities.
Underlying the effort is concern that, while the old economy drivers languish, the outlook for the new, services and consumption-driven sectors will be damaged by a shock to confidence from tumbling shares. Add to the mix financial stability concerns arising from the leverage used in retail stock purchases, and the case for action became compelling.
“The flurry of measures by the Chinese government in response to the deepening stock market slump signals a growing sense of panic amongst Chinese authorities about the transmission effects of the financial turmoil,” said Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight in Singapore.
The last time the Shanghai Composite Index nosedived as it has since mid-June, the response was different. In 2008, a period when there were fewer individual investors and leverage was less prominent, the leadership unleashed a record fiscal stimulus, with local governments loading up on debt in a development-and-infrastructure rush.
Back then, “secondary” industries including manufacturing still reigned supreme in the economy, with a 46.2 percent share versus 40.4 percent for services.
The structure of the economy has evolved, under a push by President Xi Jinping and Premier Li Keqiang to foster domestic-demand driven growth with less leverage. Services were 48.2 percent of the economy last year, with the secondary sector at 42.6 percent. (Agriculture makes up the “primary” sector, according to the government’s definitions, with services called “tertiary.”)
The services sector’s outperformance was one reason why the government felt “reasonably comfortable with its policy mix until recently” said Tao Dong, chief regional economist for Asia excluding Japan at Credit Suisse Group AG in Hong Kong.
“The job market is healthy despite the struggle in the manufacturing world,” Tao said. “But if the stock market crash continues, consumer confidence would be affected, along with financial stability.”
While in the U.S., shifts in stock values are perceived to filter through to consumption via the wealth effect, in China that channel is still limited, HSBC Holdings Plc economists wrote in a note Tuesday. Stocks are less than 15 percent of household assets, and changes in spending are more driven by incomes -- which are climbing -- than changes in net worth.
Even so, confidence could be damaged by a sell-off that the government has so far failed to halt, considering that there are now more than 90 million individual investors in China -- more than the number of Communist Party members. And the role of record leverage brings other implications.
As shares fall, borrowers will find it difficult to repay, “so problems that start on the equity market may end as stress for the banks,” according to Tom Orlik, Bloomberg’s chief Asia economist based in Beijing.
The decline also hurts the leadership’s rebalancing strategy by cutting off a source of funding for smaller companies that find it harder to get loans in the state-dominated banking system.
“Part of the hope for a sustained bull market is that it would make it easier for innovative firms in the technology and services sectors to raise funds,” said Orlik. “The correction puts that at risk.”
A hit to financial services stemming from the equities rout would undercut the best performing sector of an economy forecast to expand the least in a quarter century this year. Bloomberg’s monthly gross domestic product tracker shows growth has been undershooting the government’s 2015 target pace of about 7 percent all year.
Financial intermediation surged 15.9 percent from a year earlier in the first quarter, the standout performer among the nine industry groups outlined by the statistics bureau.
“The government is trying hard to prevent the negative impact of stock market deleveraging from spilling over to the banking system and the real economy,” said Shuang Ding, chief China economist at Standard Chartered Plc in Hong Kong. “More measures can be expected if the actions so far prove insufficient.”
Tuesday’s trading didn’t lessen the case for further actions. The Shanghai Composite fell 1.3 percent, taking back much of a Monday rebound spurred by officials’ latest slew of actions to shore up the market.
Declines continued on American exchanges Tuesday. The Bloomberg China-U.S. Equity Index, which tracks the biggest Chinese companies trading in the U.S., tumbled for a fourth day, dropping 7.8 percent as of 10:22 a.m. in New York. Alibaba Group Holding Ltd. fell as much as 4.9 percent to $76.31 in New York, the lowest since it began trading in September.
— With assistance by Enda Curran, and Kevin Hamlin