In the share market crisis socialism saved China again
In June and early July, during the share market crisis, China’s socialist economic structure saved the country from an economic catastrophe - that is the decisive lesson to be drawn from recent financial events. If China had followed the advice of neo-liberals, and those supporting capitalism, who were fashionable in some circles a few years ago, China would today be facing financial meltdown, a sharp fall in its setback population’s living standards, and major economic crisis.
The first mechanism which prevented the share market problems from turning into a deep economic crisis in recent events wassimply use of the state’s ‘visible hand’ - the overall grip of the state on key economic parameters and the willingness to use it. Without the state’s direct ability to ensure major shareholders did not sell their holdings, thecancellation of IPOs, in some cases forced buybacks by past sellers, closingof trading in some companies, and providingample liquidity for the market the momentum of the share price fall would have become uncontrollable.
But even a political willingness to use the state’s ‘visible hand’ would have been powerless without the economic resources to support this. A private company dominated banking system would have been overwhelmed by clientslosses on the share market, by potential calls on margin trading, and by consequent financial company bankruptcies. This great weakening of private banks, at best,that would have followed from this meltdown would have then prevented solving what is now a negative outcome of the share market falls – for a period companies raising capital via the share market will be more difficult due to the cancelling of IPOs and other reasons. But fortunately the strength and stability of China’s state owned banking system is adequate to prevent this major macro-economic problem from developing.
If full liberalisation of China’s capital account had existed the sharp downward fall in share prices, creating elements of panic in some quarters, would undoubtedly have been transformed into a massive exodus of capital from the country. Similar mechanisms, when there had been problems in the financial system, turned the 1997 South East Asian debt crisis into economic collapse. At a minimum China would have faced huge losses to its foreign reserves attempting to deal with such capital flight and possibly a far worse financial crisis.
But instead of such major, even disastrous, economic consequences the financial situation was brought under control and the macro-economic consequences will be quite limited. Of course problems in the share market may not yet be fully over – oscillations may continue for a further period. But the strength of China’s socialist macro-economy has already shown it can deal with them.
The situation would be completely different today if the ideas of neo-liberalism and pro-capitalist policies advocated by some had been pursued.If that had occurred tens of millions of Chinese citizens would already have lost the bulk of their savings due to an uncontrolled share price fall, Chinese companies would be starved of finance, a huge exit of capital from China would have occurred and deep economic crisis would be gripping China.
Neo-liberalism and pro-capitalist economic ideas were regrettably sometimes treated as though they were some sort of silly or even fashionable intellectual game. Recent events show the catastrophe they would have represented for China. Hundreds of millions of people in China would have paid for neo-liberal and pro-capitalist economic proposals with major falls in living standards and China’s national regeneration would have suffered a severe setback. Instead, due to China’s socialist economic structure, the situation could be brought under control.
Of course China embarked on the path of socialism to deal with far more serious issues than share market problems – it was to secure national independence, throw out foreign occupation from the country, and ensure China’s all round national regeneration. As Xi Jinping summarised:
‘In 1911, the revolution led by Sun Yat-sen overthrew the autocratic monarchy that had ruled China for several thousand years. But once the old system was gone, where China would go became the question. The Chinese people then started exploring long and hard for a path that would suit China's national conditions. They experimented with constitutional monarchy, imperial restoration, parliamentarism, multi-party system and presidential government, yet nothing really worked. Finally, China took the path of socialism.’
But, nevertheless, on a more limited scale the share market problems very vividly illustrate the same issue. China’s socialist structure allowed it to bring an economic problem under control. The ideas of neo-liberalism and capitalism would have led China to a catastrophe.