Paul Krugman: Bungling Beijing’s Stock Markets

The Chinese leadership appears to be "imagining that it can order markets around":

Bungling Beijing’s Stock Markets, by Paul Krugman, Commentary, NY Times: ... Is it possible that after all these years Beijing still doesn’t get how this “markets” thing works?

The background: China’s economy is ... slowing as China runs out of surplus labor. ... The ... problem is how to sustain spending during the transition. And that’s where things have gotten weird.

At first, the Chinese government supported the economy in part through infrastructure spending, which is the standard remedy for economic weakness. But it also did so by funneling cheap credit to state-owned enterprises. The result was a run-up in these enterprises’ debt, which by last year was high enough to raise worries about financial stability.

Next, China adopted an official policy of boosting stock prices... But the consequence was an obvious bubble, which began deflating earlier this year.

The response of the Chinese authorities was remarkable: They pulled out all the stops to support the market — suspending trading in many stocks, banning short-selling, pushing large investors to buy, and instructing graduating economics students to chant “Revive A-shares, benefit the people.”

All of this has stabilized the market for the time being. But it is at the cost of tying China’s credibility to its ability to keep stock prices from ever falling. And the Chinese economy still needs more support.

So this week China decided to let the value of its currency decline... But Chinese authorities seem to have imagined that they could control the renminbi’s descent, taking it a couple of percent at a time.

They appear to have been taken completely by surprise by the market’s predictable reaction; namely, the initial devaluation of the renminbi was ... a sign of much bigger declines to come. Investors began fleeing China, and policy makers abruptly pivoted from promoting currency devaluation to an all-out effort to support the renminbi’s value.

The common theme in these wild policy swings is that China’s leadership keeps imagining that it can order markets around, telling them what prices to reach. ... Do the country’s leaders really not understand why that won’t work?

If they really don’t, that’s a big concern. China is an economic superpower — not quite as super as the United States or the European Union, yet, but big enough to matter a lot. And it’s facing tough times. So if its leadership is really as clueless as it has been looking lately, that bodes ill, not just for China, but for the world as a whole.