A Change in Fortune: Bursting the Bubble

WILL MAGLIOCCO looks at the impact of the China’s 2015 summer stock market crash.


When asked by one of his disciples what a government should do once a state has many people, Confucius said, simply, “Make them rich.” For four decades, the Chinese Communist Party (CCP) has done just that. From 1981 to 2010, China’s economic growth pulled 680 million people out of poverty.

It seemed this summer that China’s miracle might have come to an abrupt end. The Shanghai-Composite Index fell 43 percent from June 12 to August 26. The government’s efforts to halt the decline by preventing large shareholders from dumping stock only exacerbated the situation. Nobel Prize-winning economist Paul Krugman wrote in the New York Times that such efforts showed that Chinese policymakers “have no clue what they are doing.”

On September 3, four days after the market stabilized, the CCP held a massive military parade down Chang’an Avenue in Beijing, past Tiananmen Square and the Forbidden City. The Party called the celebration “The Commemoration of the Seventieth Anniversary of Victory of the Chinese People’s Resistance Against Japanese Aggression and World Anti-Fascist War.” But to anyone outside the People’s Republic—and probably many in it—the parade seemed like a clear effort to find some semblance of national unity after a summer in crisis. American media outlets echoed a narrative of doom and gloom. Forbes proclaimed the beginning of China’s “hard times.” Even The Economist, not known for sensationalizing, could not resist an illustration of a downward-trending Great Wall on its August 27 cover under the title, “The Great Fall of China.”

However, the situation was not quite as dire as it seemed. The stock market crash, long since ended, did not indicate that the Chinese economy is in crisis. Stephen Roach, Senior Fellow at Yale University’s Jackson Institute for Global Affairs and former chairman of Morgan Stanley Asia, argues that the China’s stock market performance is only tenuously connected to the health of the real economy. Indeed, China’s market represents the actions of a relatively small group of investors, constituting roughly 7 percent of the population. Amateur trading on the markets spiked in the year before the crash: 14 million new accounts had been created on China’s stock market in the past year. According to a survey conducted by Professor Li Gan of Southwestern University of Finance and Economics, roughly two-thirds of these new investors did not graduate from high school. Over the course of a year, amateur traders fueled a massive bubble in which stocks across the market sold at prices far higher than their actual value. Few experts were surprised when the market finally corrected itself.

Limited in its impact or not, the stock market’s rough summer has brought increased public scrutiny to the health of the greater Chinese political economic system. While the impetus for alarm was new, alarmism itself has been a fixture of Western analysis of China for decades. Perhaps the most infamous example of Western pessimism about China is Gordon Chang’s 2001 book, The Coming Collapse of China, in which Chang, a lawyer, assuredly proclaimed, “The People’s Republic has five years, perhaps ten, before it falls.”

As China’s GDP growth began to tail off in 2010, the doubters emerged in force. More recent concerns hinge on China’s unsustainable, export-driven, high-investment economy and the necessary transition to a system that relies on a more robust domestic consumer base. In a 2013 Washington Post interview, Patrick Chovanec, Adjunct Professor at the Columbia University School of International and Public Affairs explained China’s conundrum most succinctly. Chinese manufacturing, he wrote, relied too heavily on global demand. “This model works well for a developing economy, but when you become the second-largest economy in the world, it’s very difficult for the rest of the world to absorb those imbalances.” In other words, as China’s economy gets larger, it cannot rely on global consumption to fuel such rapid growth. As a result, China must scale down investment, boost domestic consumption, and build a more robust domestic market for services.

Experts are in consensus regarding China’s economic challenges and their long-term solutions. Even the CCP has recognized the necessity for a shift to an economic model that can support more normalized growth. In 2003, former premier Zhu Rongji remarked that his greatest fear was “an overheating economy.” In 2011, China decided to address this worry publically for the first time. The CCP’s twelfth “Five-Year Plan,” published in 2011, stated outright that China had to “have a clear sight of the imbalanced, incompatible, and non-sustainable elements within China’s development.”

In the West, the CCP’s ability to address such concerns has come under serious doubt, fueling the suspicions of commentators who have long-held China is on the brink of collapse. Yet many in the West do not fully grasp Chinese policy itself and the conditions Chinese policy makers face. One example lies in media coverage of China’s “ghost cities.” These newly built, massive, uninhabited real estate developments have been heralded as a sure sign of China’s impending economic catastrophe. Yet, several experts have argued that the ghost cities are not actually the byproduct of an oversaturated real estate market. Instead, they are a solution to a pressing domestic problem: the mass migration of rural Chinese to cities in search of economic opportunity.

China’s developed cities are overflowing with poverty-stricken, undocumented migrant laborers, many of whom must leave their young children and elderly parents at home to fend for themselves. Says Stephen Roach, “Rural urban migration is still running between 15 and 20 million people per year, and China is building new cities to address that need. When Sixty Minutes does an exclusive on ghost cities, they do not  follow up with a sequel to show that the ghost cities they warned of are now fully occupied.” Data corroborates Roach’s explanation: a Standard Chartered study found that occupancy rates in three large-scale development projects—Zhengdong’s New District, Zhenjiang’s Dantu district, and Changzhou’s Wujin district—more than doubled between 2012 and 2014. Urbanization is expected to continue in China for the next two to three decades.

The argument over China’s real estate bubble speaks to the difficulties that arise when judging one country’s policies by another’s standards. Any government whose policy is to finance the construction of whole cities and wait for them to fill up is bound to raise eyebrows in a nation built on free market economic principles. But China is still a central command economy and its response to internal migration and urban overcrowding issues reflects a commitment to those principles. Of course, China, in many ways, continues to support capitalism as well. “It’s an absolute contradiction,” says Orville Schell, Director of the Center on US-China Relations at the Asia Society. “State command, centralized economy on the one hand and a marketized free-enterprise system on the other. You can make a judgment on the basis of either systems and it would be both true and wrong at the same time. It makes it very hard to discuss intelligently.”

As China plods along through a messy economic transition, questions about the competence of CCP leaders and the ongoing viability of China’s hybrid economy, not to mention its authoritarian politics, are unlikely to go away anytime soon. Predictions of the economy’s—or the regime’s—imminent downfall are equally unlikely to disappear. But for a regime that has staked its reputation on bringing economic prosperity for nearly four decades, the inevitable growth slowdown is bound to come with uncertainty. This summer’s stock market crash, far from being a harbinger of the coming meltdown, tested public perception of the Party’s absolute control: the market bubble popped and stocks continued to plummet for nearly two months after government intervention. As it has done for four decades, the Communist Party with its unorthodox policies and hybrid economic model lived to see another day.


Will Magliocco is a sophomore at Yale University. Contact him at