The Chinese economy is slowing, the housing market has ground to a halt, the banking sector is laden with debt, and the Shanghai Composite is swinging wild hitting new highs on Monday to drop 6.5% on Thursday.
As you can imagine, the Chinese government is worried. So it’s preparing its people for hard times the only way it knows how — in a way that looks like bizarre political theatre to outsiders.
‘An authoritative insider’
Let’s take this back to Monday, when the Shanghai Composite posted its biggest single day rise in months.
That’s when The People’s Daily, a state newspaper, published an interview with “an authoritative insider” who acknowledged that while an economic slow down is coming, Chinese people still should be using their ample savings to boost the economy.
“Seen from the stage China is at right now, whether it can transfer savings to effective investment will be the key to stable economic growth,” said the insider.
The insider went on to discuss the soundness of China’s fundamentals, it’s strength in the global community, and the challenges faced by over-levered state run companies.
You can believe that this was an absolute must-read in China too. In an editorial note above the interview, The People’s Daily wrote (emphasis added):
People’s Daily recently interviewed an anonymous “authoritative insider”, presenting five most pressing questions on the Chinese economy. In the Q&A, the insider urges straightly face up to problems in the development of China’s economy, maintain strategic focus on restructuring the economy, and expresses confidence in the prospect of China’s economy.
This interview goes viral since it is believed to contain important message from the high level authority.
And the market goes wild
To China watchers, this kind of statement is pretty clear. It’s the government saying ‘read this piece, now go buy some stocks, guys.’
And so people did. On Monday the Shanghai Composite shot up.
In a follow-up piece, The People’s Daily published a story called ‘Who is the authoritative insider in the People’s Daily?’ by Xiakedao (that’s a pen name).
“The stocks posted strong gains during the past two days and everyone was happy,” Xiakedao wrote. “Xiakedao doesn’t know why, even if he knows he wouldn’t tell you, but we could discuss who this authoritative insider is – it’s a figure we’re familiar with.”
The People’s Daily has been dropping stories like this for months, shepherding people through their new ability to put money in the stock market, and trying to explain that the economic downturn to come is a “new normal” — gently letting them know that unlike when the economy collapsed in 2009, no massive stimulus is coming to pump cash back into the system.
China has communicated to its people like this before
This “authoritative insider” thing is a sign of how serious this government is about this too. Mao Zedong used to write editorials as an ‘authoritative insider’ when he wanted to get his thoughts out. Using that moniker is a signal that what this editorial says, goes.
“China should concentrate on reconstructing the economy, avoid concerns about growth rate fluctuation of one or two percentage points, and under no circumstances become so anxious as to resort to strong stimulus,” said the authoritative insider.
The stimulus isn’t coming because the stimulus can’t come. China is carrying too much debt, and the government thinks it’s time to restructure over-levered industries like housing and construction instead of piling on more.
That means things are going to hurt for a while. This is the “new normal.”
The People’s Daily, on Tuesday, prepared people for that in a subtle editorial entitled, ‘To sceptics: Chinese economy is not gonna collapse’.
Here’s a peak:
China’s economy has now entered a new normal. The Chinese government is a capable steward and confident that it can lead the economy to overcome any obstacles that present themselves, keep steady and sustainable growth, and become a strong power to support the world economy. The confidence of the government results from an objective assessment of China’s position.
In terms of the economy, though growth has slowed down, the growth rate remains stable and issues of concern such as unemployment, hyperinflation, and debt crisis have not emerged…
So don’t worry, right? Consider this thing handled.
Until it’s not.
Adapting to the ‘new normal’
On Thursday, the Shanghai Composite fell 6.5%. An uncomfortable fall for investors who have seen their stock market climb 50% since March.
Immediately there was a response on state media outlet Xinhua (you can’t expect The People’s Daily to do all the heavy lifting). This time, President Xi made the statement himself while visiting Zhejiang, a Chinese province.
“Our understanding and practice of the new normal have just begun,” said Xi, adding efforts must be spent on solutions to adapt to the “new normal,” aimed at safer and higher-quality growth. “There is always a path out, and the path is lying at our feet,” said Xi.
For the Communist Party this is important political theatre. Since its modern inception it has promised economic growth, and tied that growth to Chinese nationalism. If the people feel like the Party can’t deliver, all the things they deal with — the censorship, the brutality of Xi’s anti-corruption drive, the lack of political freedom — will be for naught. That’s when unrest occurs. When promises are broken, society breaks too.
So everyone stay calm.
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