A rapid 28 percent drop in the stock exchange certainly seems like a big deal to the average American investor. If the New York Stock Exchange took that kind of plunge, people would be postponing retirement and humanitarian organizations would be lining Wall Street with air bags. So, naturally, when the Shanghai stock market took that kind of plunge last week, the Western media stood up and noticed. Coming on top of some (for China) tepid growth figures, predictions of the end of the Chinese miracle proliferated.
But China isn’t America—and in fact, it isn’t really a market economy yet. As Arthur Kroeber, a Brookings nonresident fellow and head of research at Gavekal Dragonomics explains in a recent Brookings paper, the Chinese stock market isn’t nearly as essential either to the Chinese economy or to Chinese policymakers as the American stock market is in the United States. For this reason, the extensive Chinese government effort to prop up the stock market reflects not so much a general worry about the economy as the Chinese securities regulators’ effort to convince the broader government that equity markets have a future in China.
Overall, Kroeber argues, the crash and the government intervention tell us more about Chinese political debates than about the Chinese economy. There is no consensus within China on the appropriate balance between market forces and state intervention in the economy. Even as market mechanisms have played an increased role in recent years, state planning and state ownership of key assets remain essential elements of the Chinese economic model. If, as many financial technocrats want, capital markets are to play a larger role in the Chinese economy, they will need to prove that they can be stable and even, paradoxically, responsive to state intervention in crises. As Kroeber concludes, “Beijing will doubtless keep trying to develop bigger and better capital markets, while at the same time intervening whenever those markets take an inconvenient turn…[so] we will see plenty more wild rides in the Shanghai stock market in the years to come.”