In recent months, you could have been forgiven for thinking that China was slipping back into the bad old days of Maoist planning. Coal producers in Shandong and Shaanxi have been told to raise output and cut prices, banks forced to rein in lending and hold buckets of cash in reserve, mutual fund managers instructed not to sell into a falling market, companies forced to pull share listings… The list goes on.
Despite Beijing’s assurances that it still intends to give the market a greater role in running the economy, it is hardly surprising if investors begin to feel queasy. Who would buy shares in a coal company forced to sell at below market levels? Why take a punt on state refiners inadequately compensated for subsidizing fuel prices?
What enthusiasts of economic reform often forget is that it never was Beijing’s intention to create a Hong Kong-style free market. The aim was and still is to forge a mixed economy in which big state-owned enterprises dominate key sectors and the state retains a high degree of involvement.
Above all else, the policymakers are pragmatic: They will use whatever measures, whether market-based or administrative, they deem to be effective.
In these inflationary times they have naturally turned to reliable methods of old. Hence moves to control money supply by fiat rather than through higher interest rates. This does not mean that Beijing is no longer committed to developing modern monetary tools – but it does mean that it is willing to junk long-term aims for short-term gains.
Similarly, government intervention in food and coal prices does not indicate a structural shift away from realizing its long-term aim of relaxing price controls. What it shows is that policymakers regard setting prices as a useful short-term means of stemming inflationary pressures. Beijing maintains its tight grip because it believes that to do otherwise would be political suicide. Nevertheless, there is still an awareness that subsidizing fuel prices indefinitely is economically unviable.
The government has the fiscal strength to prop up domestic fuel consumers for a few more years, but we can expect prices to be lifted gradually towards international norms. This does not mean, however, that Beijing will abandon its commitment to smoothing out volatility in market-set prices. And for the hundreds of millions of China’s vulnerable poor that is no bad thing.
Under this mixed bag approach, the government will continue to intervene to solve specific problems. The reduction in stamp duty paid on share trades earlier this year, for example, showed that policymakers are not afraid to bolster the stock markets for the sake of social stability.
If the current bear run continues, the government will again likely cave in to pressure to boost sagging investor confidence in the stock market by setting up a state fund to buy shares. Rumors abound that investors will also be allowed to participate in margin trading – buying stocks with money borrowed from brokers – if the Shanghai Composite Index falls below 2,000 points.
Meanwhile, bank loan quotas will remain in place as long as the central bank thinks too much money is sloshing around the economy and commodity producers will be told to hold down prices so long as inflation remains an immediate risk.
In Beijing’s eyes, tougher times call for state intervention. This does not mean China is abandoning market reform, but it does mean that administrative measures will remain a feature of economic policymaking for the foreseeable future.