While Greece Burns, China's Stock Market Is Also Aflame

The stock market woes likely have two causes. One: China's increasing belligerency towards its neighbors and the U.S., which has made investors mighty nervous. And two: China's overly indebted economy is downshifting from boom to bust as its population ages and slowing productivity and a lack of innovation become millstones around the economy's neck.

In just a month the Shanghai index has plunged nearly 29%. Newscom

After a selloff in which shares lost nearly a quarter of their value, China's government has stepped in to lend money to those who want to buy stocks. Gee, what can possibly go wrong with that?

Leftist governments always suffer from the delusion that they can manipulate markets to do whatever they want them to. Of course, it might work for a short time. But it inevitably fails.

China will test that hypothesis. In just a month, the Shanghai stock market index fell nearly 29%, while the high-tech Shenzhen index plunged more than 33%. China's lost nearly $2.5 trillion in stock market wealth.

Matt Schiavenza at The Atlantic Monthly puts the data into perspective: that $2.5 trillion is about 10 times the size of Greece's entire economy, and China's 1.2 billion people dwarf Greece's population of just 11 million.

So, yes, China is a huge problem, one that has dropped off the radar while Greece hogs the headlines.

Even so, alarmed by the market's cratering, China's government has cut interest rates, warned traders not to short the market and canceled pending IPOs.

China's government prodded its largest brokerage firms to "announce" a fund of $19 billion to purchase shares of large companies battered by the market collapse. So the government is buying shares.

We know how this ends, don't we? Remember our failed government policy of encouraging homeownership through massive subsidies and cheap loans? How did that work out?

The stock market woes likely have two causes. One: China's increasing belligerency towards its neighbors and the U.S., which has made investors mighty nervous. And two: China's overly indebted economy is downshifting from boom to bust as its population ages and slowing productivity and a lack of innovation become millstones around the economy's neck.

Think Greece has too much debt? Quietly, China's debt has become a megaproblem. Earlier this year, McKinsey & Co. estimated that the country's debt had reached an astronomical $200 trillion — or roughly 286% of GDP, a rise of 40% just since 2007.

Meanwhile, economic growth is slowing fast — too fast for China's Communist planners to adjust. Officially, China's 10% GDP growth has slowed to 7% or so. But some private economists think it'smuch slower.

Three years ago, China passed a milestone of sorts: The working-age population began shrinking, thanks to the 37-year-old One-Child Policy that has brought population growth to a halt.

No nation with a shrinking workforce can grow unless it has outsized productivity gains. With investment no longer growing at double-digit rates as it did for nearly three decades, productivity growth in China is also likely to shrink.

When Xi Jinping today talks of the "new normal" for the economy, as he did recently, he's really warning all of us: China's boom economy is finished.

No, that doesn't mean that it will collapse or that Greece-style defaults are imminent. After all, China has attracted huge amounts of investment and still remains a force in global manufacturing.

But it will never be the same, and neither will its stock market. The government helped create a bull market by underpricing IPOs , encouraging buying on margin and looking the other way as companies and local governments cooked their books.

Now, like King Canute wading into the waters, China's Communist functionaries seem to believe they can force markets to do what they command.

That's doubtful. The 90 million or so Chinese who owned shares in the stock market and have now gotten their first real haircut will be a lot less enthused about investing the next time around.

Meanwhile, China's enormous debt pile won't disappear. China likely will never be Greece, but it probably won't ever be like the old China again, either.


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