China’s Communist Party leaders say they’re learning to love free markets – to a point. With an economy weighed down by overcapacity and surging debt, the government is overhauling a financial system that was built to fuel high-speed growth. Its stated goal: Give markets a “decisive” role in setting prices and interest rates. The unstated challenge: Avoid exacerbating the economic slowdown, triggering panic in global markets or weakening the party’s grip on power. China’s epic stock market boom and bust in 2015 revealed a leadership frantically shifting course. Leaders stepped in again to contain steep declines in 2018, albeit less aggressively. The fiddling reveals a conflict between the desire to embrace elements of capitalism and an instinct to shelve reforms and assert control when things go awry.
Government moves to stem routs in shares, commodities and the currency have included banning sales by major stakeholders, restricting short-selling and pushing state-owned bodies to purchase equities. It also has allocated billions of yuan to reduce fallout risks from companies that pledged shares as collateral for loans. In the 2015 meltdown, the Shanghai Composite Index tumbled more than 40 percent in just over two months; Nearly half the market was suspended, triggering rebukes from stock-index compiler MSCI Inc. China devalued the yuan later that year and promised to rely more on supply and demand to determine its daily fixing to the U.S dollar. Most interest rates now are determined by the market, though the central bank steps in during volatile periods. China’s progress was acknowledged when the International Monetary Fund added the yuan as a reserve currency from 2016, and MSCI added mainland China to its benchmark stock indexes in 2017. A liquidity crunch for private companies — a side-effect of a government campaign to tackle risks in the financial system — and concern over share-pledging triggered another sell-off in 2018. Sentiment had already been hurt by a trade war with the U.S., currency weakness and the slowing economy. Though much less visible than before, China’s “national team” of state investors was enlisted again, while banks were told to increase lending. Yet the government is still making market-friendly noises. It published rules for cross-listing stocks between Shanghai and London and made it easier for foreigners to trade China’s bonds.