China's financial opening
Over the great wall
Chinese markets shake off their casino reputation. Can foreigners actually win?
In a world where internet memes can explain market swings, China is second to none. Early in March, with mainland equities down by 15% in two weeks—their steepest fall in years—a video circulated on Weibo, a microblogging site, of a sheep stuck in a fence on a hill and a hiker climbing up to free it. The description of the video, in its meme incarnation, was "the national team comes to rescue me". The national team is shorthand for big state firms that are believed to stabilise the market by buying shares when they plunge.
This video, though, had a twist. The hiker frees the sheep, only for it to lose its footing and tumble down the hill. Talk of the national team's rescue mission had spread for a few days, but equities continued to tumble, wiping out all gains made since late last year.
At last, on March 9th, the national team really did arrive. State media reported that large state-owned insurers had bought stocks. Coincidentally or not, that heralded the market bottom. For casual observers of Chinese finance it all fit a familiar pattern: stocks careening from boom to bust, propelled by day traders and rumours, and the government eventually restoring calm.
But to those inside the market, the story was in fact more novel. The decline in Chinese shares neatly paralleled the decline in the NASDAQ, America's tech-heavy stock index. Guan Qingyou, a prominent Chinese economist, argued that the underlying trigger was nervousness about inflation in America. A resulting jump in American bond yields had sparked risk aversion globally and hit China hard. Foreign investors, who had helped fuel China's equity rally last year, retreated. Reacting to the same signals, big domestic fund managers also rushed to pare their holdings.
The sell-off, in other words, furnished evidence about two important areas of progress in China's capital markets: they are both more professional and more interwoven with global finance than before. At the same time, incessant talk about the national team was a reminder of the idiosyncrasies of finance in a state-dominated economy—idiosyncrasies that matter ever more to the rest of the world.
Just five years ago no analysis of finance in China was complete without a detailed look at shadow banking. Formal banks were too strictly controlled to satisfy borrowing needs in the fast-growing economy. Stock and bond markets were underdeveloped. So between the cracks, lightly regulated institutions cropped up, willing to lend to anyone with collateral—especially property developers and miners.