When historians write the definitive accounts of the great Chinese stock bubble of 2015, this weekend's rate move may deserve its own chapter. By cutting borrowing costs to a record low, Governor Zhou Xiaochuan told a hundred million mainland day traders to keep on buying.
Great intrigue surrounded the silence of the official media last week amid the biggest two-week plunge in stocks since 1996. Xinhua had been the loudest cheerleader, churning out countless stories on the wisdom and patriotism of buying shares. So when Xinhua, long considered the "throat and tongue" of China's government, suddenly went quiet, punters figured the rally was over.
Zhou stepped up Saturday to disavow that notion with a three-pronged easing. Traders called it the "Zhou put," a reference to Alan Greenspan's penchant for rescuing markets when he led the Federal Reserve in the 1990s and 2000s (the "Greenspan put"). The People's Bank of China cut the benchmark lending rate by 25 basis points to 4.85 percent, reduced the deposit rate by a quarter percentage point to 2 percent and lowered the required reserve ratios for some lenders. The clear message: Don't worry stock-buying comrades, we've got your back.
But these latest moves could come at a price for Zhou and his boss, President Xi Jinping. At some point, all equity rallies hit a wall, and so will China's. From Tokyo to Seoul to New York, the history of the last 30 years is littered with examples of how it ends badly when stock manias run ahead of economic reforms. The speed and the scale of China's run-up (Shenzhen shares are up 131 percent in 12 months) endangers the global economy as much as, if not more than, each of those episodes. And as the "Zhou put" makes clear, Beijing's strategy is to generate even more froth.
Surging stocks are now Beijing's favored stimulus tool. All those ghost cities, massive factory overcapacity and excessive debt have Xi's men looking to boost confidence via share prices. Beijing is loosening fiscal policy, too, to prevent a hard landing. It doubled the size of a debt swap program, offering local governments cheaper financing to alleviate a credit crunch. But China's other giant bubble -- debt -- limits its ability to support growth conventionally. It hopes rising shares will help companies raise capital to pay down debt, while enlivening consumers to spend more.
Households across the 1.3 billion-person nation are sitting on $21 trillion of savings. Xi figures that channeling more of that money into shares will unleash a virtuous cycle: greater wealth, increased consumption and a return to 8 percent-plus growth. But as history shows again and again, it's an unsustainable gambit in the long run.
China needs to let more air out of its bubble, not keep pumping it up. In the days ahead, markets will revel in the Zhou put's perfect timing in stemming a panic in Shanghai (where shares tumbled 7.4 percent Friday alone). But in the years ahead, it may be remembered as the moment the Communist Party was subsumed by the same irrational exuberance coursing through equity bourses.
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