William Hongsong Wang
This January, my best friends in high school invited me to invest money in the Chinese stock market. Then I hesitated for a long time till this July, seeing the stock market crash and finally deciding to stay away from this place where one is apt to get into trouble. Earlier this year, they told me that I made a stupid decision, but now they praised my wisdom of not entering Chinese stock market to avoid loss and asked me how to analyze this stock crash from the perspective of the economic science.
Yes, the reason why I didn’t invest my little money into Chinese stock market is not that I don’t want to be a rich man, but that if I do this, I may become poorer than before. Why? Let us analyze Chinese economic situation generally at first.
According to media data, in the end of 2014, Chinese local government debt levels reached almost ¥ 25 trillion (US$ 4 trillion) . And in many provinces across China, empty ghost cities are located there quietly. I calculated the investment sizes (due to lack of government transparency, I can only collect partial data) of the top-12 ghost cities from the news report, which reached US$ 8.38 billion . Besides, many enterprises have been bankrupted because of over－investment induced by the ¥ 4 trillion (US$ 586 billion) stimulus plan in 2008. Those are just a tip of the iceberg. As seeing so many bad news which are worse than my imagination, now I have an illusion that maybe I’m in grace, not the strong and powerful China…
Another bad news is that, after the crazy Keynesian economic stimulus plan in 2008, in this March, Chinese central bank broke the silence and decided to lower benchmark five-year lending rate from 6.15% to 5.90% and started issuing more paper money in loan which meant that a new economic cycle will begin.
As an economic student with the knowledge of Austrian Business Cycle Theory, I don’t see this news being good for the future of the Chinese economy. I don’t see that there would be no economic bubble again in the Chinese stock market. That’s why I didn’t invest in my country’s stock market.
I’m lucky, because I don’t have any loss. But I heard not only one Chinese lost his millions and millions of asset in this turn of stock crash, then there’s no good news because the economic bubble has happened. This morning, the stocks in Shanghai Stock Exchange have dropped as much as 6% and this disaster is continuing. Sources have clearly pointed out that this is because of capital chain rupture and self-distrust from investors.
Economic common sense tells us that if this capital chain rupture extends to other economic sectors, China may face a very serious economic crisis, like the one in 1929 in United States. And the worse issue is, Chinese government has decided to devote more currency into stock market to save it. What will happen? Inflation and another turn of economic bubble. The more issuance of paper money by government and the fast expansion of fictitious economy caused by it will cause price signals’ disorder. Investors will say, if they don’t have the knowledge of business cycle, “wow, awesome! What a huge amount of loan, which I can apply for! Let me invest it and earn more!” Because of their optimism, more financial derivatives will be made to meet the need of blind investors, eventually causing mal-investment. Then if the capital chain cracks, we will see what we are seeing now in the Chinese Stock Market.
I don’t see that Chinese central government has the courage to stop making more economic bubble and it seems that Chinese deregulation reform has stagnated due to the obstruction from different interest groups. If I were to make a conclusion of this issue, I would say that we are facing the end of Chinese false economic prosperity.
［1］ Zhang, Lianqi (2014) Chinese local government debt danger and opportunity. London:Financial Times Chinese. Available: http://www.ftchinese.com/story/001054454?full. [Accessed: 8 July 2015] Also see Wang, Yuguan (2013) The Warn on New Cities Plans from Chinese Central Government. Beijing: EnnWeekly. Available: http://www.ennweekly.com/2013/1012/12253.html.%5BAccessed: 8 July 2015]
［2］Those ghost cities are: Kangbashi New Area in Inner Mongolia Autonomous Region, Qingshuihe County in Inner Mongolia Autonomous Region, Bayannur City in Inner Mongolia Autonomous Region, Erenhot city in Inner Mongolia Autonomous Region, Zhengdong New Area in Henan Province; Hebi City in Henan Province, Xinyang City in Henan Province, Yinkou City in Liaonin Province, ChangZhou City in Jiangsu Province, Dantu District of Zhenjiang city in Jiangsu Province, Shiyan City in Hubei Province and Chenggong District of Yunnan Province.
William Hongsong Wang is a researcher from the Shalom Institute and has graduated with a masters degree of Austrian Economics from the Universidad Rey Juan Carlos in Spain (King Juan Carlos University).