Anemic firms are being pumped full of state-funded financial steroids in a move to prop up China’s markets and rescue retail investors from a serious bout of ‘cold turkey.’
Data released by the China International Capital Corporation, or CICC, showed that state and local government financial institutions have taken controlling stakes in at least 32 companies listed in Shanghai and Shenzhen.
Beijing’s intervention comes at a time when the economy faces a myriad of problems, including rising trade tensions between China and the United States.
Side-effects from President Xi Jinping’s credit crunch and a weakening renminbi, along with a meltdown in mainland markets, have further complicated the issue.
“This is about survival,” Ronald Wan, the CEO of Partners Capital International in Hong Kong, told the South China Morning Post. “When doors are shutting elsewhere, the only one who can save them seems to be the government.”
Nearly US$3 trillion has been wiped off the Shanghai Composite Index in the past nine months and $1.1 trillion in Shenzhen.
Bearing the brunt of the market turmoil has been the army of 150 million individual investors.
Since the majority are from the affluent middle class, this will have a serious effect on the Chinese economy, which relies on their spending power.
Already the warning signs are flashing of a winter of discontent unless a trade war armistice can be hammered out.
Strategists at DBS Group Research in Singapore were quick to pour cold water on Monday’s brief market surge.
“[The] 4.1% rally in the Shanghai Composite Index is likely to have been a dead cat bounce,” they reported in a note to clients. “Any stimulus by China should be viewed not as a boost but as a cushion against … external headwinds.”
These include mixed signals from Beijing.
In the past six months, there have been concerns about the lack of progress in economic liberalization.
Moreover, the private sector has been hit hard by the trade conflict, as well as the squeeze on financing.
“Many businesses cannot survive amid this de facto discrimination [with state-owned enterprises],” Li Yang, the former deputy head of the Chinese Academy of Social Sciences, told the influential Chinese Economists 50 Forum, earlier this month.
Still, a transfusion of state-backed funding might just ease their plight … at least in the short term.