Is China Flying too high?

Flying too high

The long-term consequences of China’s coming stockmarket correction are the ones to fear

First, the Chinese economy has depended disproportionately on borrowing in recent years: total debt has jumped from about 150% of GDP in 2008 to more than 250% today. More equity financing is needed to diversify the mix of corporate funding, and to take the pressure off a banking system that is weighed down by dud loans.

Second, it could slow the pace of financial liberalisation. Chinese regulators have made impressive progress recently—for example, by freeing the rates that banks charge for loans and dangle on savings products, and by relaxing capital controls. A bust might deter them from pressing ahead with more market-based policies.

That would be a mistake. More market reforms, not fewer, are needed to put China’s stockmarket on a sounder footing. Making it easier to short stocks would enable sceptical investors to put downward pressure on ballooning shares. Giving mainland punters more access to foreign stock exchanges would drain some of the speculative cash from China. Speeding up listing processes would ensure that the supply of equities can rise to meet surging demand; otherwise money just chases the existing pool of stocks. China cannot eliminate booms and busts from its financial markets, but it can remove the distortions that make them all too common.|hig|28-05-2015|

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