Some years ago, I sat with an old China hand in a Beijing teahouse sipping oolong. An American director at a local education firm, his face was grey, creased by decades of pollution and office politics. But when talk turned to the country’s first spacewalk, recently completed, his brow furrowed. 'Have you ever noticed that the government is trying to do everything the United States did, but 50 years later?' He ticked off a list of the mainland’s aims and achievements, from manned space travel, to plans to place a Chinese citizen on the surface of the Moon.
But the comparisons don’t end there. For all of its trumpeted exceptionalism, this is a country desperately striving to catch up with and copy the West. A network of Chinese motorways mimic Dwight D. Eisenhower’s 1950s Interstate System, designed to aid nation-building. Western-style conglomerates sally forth from Beijing to rule the world. State news outlets replicate the nuance of the BBC and the colour of CNN. Sporting prowess is found at the top of the Olympic medal table, or in a domestic football competition modelled on the Barclays Premier League.
Yet outright emulation is never quite achieved, partly due to national pride, but mostly because of the controlling needs of an insecure and authoritarian state. The whims of the ruling Party always take precedence over, say, any Western-style legal code or accounting principle. In turn, this creates a whole set of tensions and inconsistencies that mostly remain invisible to the untrained eye, yet which often appear at the most inopportune of moments.
This week, they bubbled up in China’s capital markets, diverting the world’s attention towards the country’s chaotic and volatile stock markets. The value of shares listed in Shanghai fell 7.6 per cent on Tuesday after tumbling 8.5 per cent on Monday. The central bank reacted today by cutting interest rates for the fifth time in 12 months, in a desperate attempt to shore up a flagging economy. This comes hard on the heels of a recent double depreciation in the value of China’s currency, the renminbi, which offered more insight into Beijing’s panicky mindset.
China’s main bourses differ wildly from our understanding of how a stock market should look and act. They may imitate the machinations of the great exchanges in London and New York. Listed companies have stock codes and issue quarterly trading results. Local retail investors (who make up 80 per cent of daily trading) can buy and sell securities with impunity, as may licensed foreign funds.
But there the similarity ends, again because China wasn’t willing to cleave fully to the Western model of free markets. From the outset, when the bourses of Shanghai and Shenzhen both opened in 1990, regulators prevented shares from rising or falling by more than 10 per cent each day. Measures designed to limit volatility merely invited greater chaos, as stocks struggled to find their natural level. The same half-measures are visible across the financial space, where the onshore renminbi remains tethered to the dollar in a tight trading band, and capital controls prevent too much money from entering or the leaving the country.
This obsession with control and semi-emulation heightens rather than girds uncertainty. 'Beijing fears volatility and risk – yet both of these are everywhere, in everything you do,' says Fraser Howie, co-author of Privatising China, and an expert on China’s malformed stock markets. They should just have accepted and adopted genuinely free capital markets from the beginning, rather than merely aping them. Had they done so, Chinese investors would be used to risk by now, and the markets wouldn’t be getting stung this way. But it’s probably too late to change the system now.'
For proof of this, look at Hong Kong, where stocks rose today, or Taiwan, where shares surged by the most in four years. The FTSE 100 index rose strongly in morning trading; New York is likely to follow suit later today. All of those jurisdictions boast unfettered Western-style capital markets, where volatility and risk are acceptable parts of the financial furniture. If China wants to be part of that world – our world – it needs to stop aping the West, swallow its pride, and join the club.