China’s Return To 1998 Is Troubling Economic Moment

This week really has been the best of times—and the worst—for Shanghai stocks acting more like electrocardiogram readings than the perceived value of China Inc.

Early in the week, plunging shares were making global headlines of the kind policymakers in Beijing abhor. The media buzzed about Chinese equities in panic mode echoing the epic swings of 2018 or even 2015.

By mid-week, though, the market was exploding higher. The team in Beijing engineered the rally by pledging big state support for companies and industries under pressure. A rout driven by fears of defaults, Covid-19 outbreaks and regulatory crackdowns on Big Tech was replaced in an instant financial euphoria. The Hang Seng China Enterprises Index rallied the most since 2008.

Yet this 1998 bookmark is instructive for another reason. That year, too, seemed like a best-of-times-worst-of-times scenario all its own.

That year, the region was several months into the 1997-1998 financial crisis. It took a while for turmoil in Thailand, Indonesia and South Korea to rope in bigger economies. When that finally happened, the fallout was spectacular.

Here, think the late 1997 collapse of the then-100-year-old Yamaichi Securities, one of Japan’s fabled big four brokerages. Or Russia’s 1998 default on government debt, an event that killed the Long-Term Capital Management hedge fund.

Back then, speculators looking for the next Asian domino to fall had two prime targets: China’s and Hong Kong’s currency pegs to the dollar. Betting was that Beijing might be forced to follow Bangkok, Jakarta and Seoul in devaluing the yuan. And then Hong Kong. Neither happened. China did more than just stand its ground. The government took a stand for big reforms.

That year, the Communist Party named one of China’s boldest reformers since Deng Xiaoping’s day as premier. Zhu Rongji hit the ground running with dizzying moves to modernize the state sector. He set the stage for China to join the World Trade Organization a few years later. Zhu’s all-out assault on state-owned enterprises was truly astounding. His policies led to the shuttering of 60,000 inefficient companies and the loss of more than 40 million jobs.

That same year, then-President Jiang Zemin was opening China at a disorienting rate. Global media slowly, but surely had more latitude to write what they saw in China. In 1998, Jiang even had the confidence to hold a joint press conference in Beijing with then-U.S. President Bill Clinton. It was carried live everywhere—even in China.

When juxtaposed with the veil of opacity with which President Xi Jinping has covered China since 2012, it’s hard not to despair. Global businesspeople like to think of Xi as a strong, resolute leader. Perhaps. But Xi’s crackdown on the media, social media, academics, tech billionaires—including Alibaba Group founder Jack Ma—and Hong Kong doesn’t smack of confidence.

Nor does it engender great confidence in global markets. One reason stocks were plunging early in the week was fear that Xi’s rather scattershot crackdowns on property development, Big Tech companies, transparency and “zero-Covid” absolutism was clouding the economic outlook.

Could it just be that Xi and his advisers just aren’t good at this economic reform thing? Slogans like “common prosperity” make for nice headlines at party conferences, but it’s hard not to wonder if Xi and Premier Li Keqiang could explain what their economic strategy is if pressed. No wonder they don’t do press conferences.

And could it be that Xi is transporting China back in time to that pre-1998 period when the state sector was even more dominant? The frantic stock market rescue this week does make you think what the last decade of Xiconomics has been all about.

The big stock troubles this week may be bigger implications than meets the eye. They suggest investors want the technocrats who favor leading China into the future, not backward, back in control.

“In effect,” says Gavekal Research analyst Andrew Batson, “foreign investors have been saying ‘please bring back the China we’re used to, where the government focuses on maximizing growth, encourages integration with the world economy and tolerates real estate and internet tycoons getting rich.’”

This, of course, is what Xi promised back in 2012. His pledge to let market forces play the “decisive” role in economic policymaking sure seems a long, long time ago. This might be less concerning if Xi weren’t on track to make himself Chinese leader for life. If only the economic reforms from the pre-Xi period were staying on, too.