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What’s behind the boom and bust cycles in Chinese markets?

Big boom and bust cycles are typical for China’s stock markets, which are often marked by huge volatility, as we saw this week. Orville Schell of the Center on U.S.-China Relations at the Asia Society joins us from Boston to discuss what else in China’s economy might be a cause for concern for the global market.

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  • HARI SREENIVASAN, PBS NEWSHOUR ANCHOR:

    And in China, the government might have stopped or slowed-down the mass sell-off that crashed its stock market this week.

    Shares there have fallen by nearly a third in less than a month — wiping out almost $4 trillion in wealth.

    After serious losses early this week, stocks actually rallied yesterday and Thursday, possibly because Beijing injected $19 billion to the country’s biggest brokerage firms. The firms are using the money to buy stocks and slow down the sell-offs.

    So how concerned should we be about China’s stock crash and are there other looming issues beyond the stock market?

    Joining us from Boston is Orville Schell, who heads the Center on U.S.-China Relations at the Asia Society.

    So, Orville, just to keep in perspective, I was looking back at the charge, the two major indexes there have doubled — I mean, more than a hundred percent in the past 12 months. That still leaves them up 60 percent or 70 percent, and that’s a figure most of us can’t wrap our heads around.

  • ORVILLE SCHELL, ASIA SOCIETY:

    So, this was really a very obvious bubble in the making. I think what made it difficult for everybody to see this specific bubble was that we are quite accustomed to finding the anomalous, the exceptional, the unusual in Chinese economy and indeed in the whole Chinese experiments.

    So, we never know whether this is part of the new extraordinary inexplicable Chinese model, whether it’s something heading for the abyss.

    In this case, it was headed for an abyss.

  • HARI SREENIVASAN:

    A lot of times people think of the economy and the stock market in synonymous terms but in China it’s not quite the case. When it got too hot, the government jumped in, they cool it down, and now, they’re jumping in to try and stem the sell-off.

  • ORVILLE SCHELL:

    Yes. And I must say — as huge as the market is in China, and with Hong Kong, it’s the second largest stock market in the world, still, it is relatively discrete in terms of its connection to the economy as a whole.

    Then I think, finally, actually, it will certainly have some effect but it’s not going to be a do or die matter for China’s economy in general. So, that’s important to remember.

    I think actually the consequences, as serious as they could be in some peripheral ways for the economy, will be even greater in the political social realm, and particularly in regard to the leadership — sort of ability to continue to evoke this sense of its omnipotence and invincibility.

  • HARI SREENIVASAN:

    So, what sort of economic ripple effects do you see here? I mean, if there’s less wealth in the market or in the country, then — does that mean that demand dries up and China buys less from the rest of the world?

    Or do their commodity prices decrease? And does that mean that things are cheaper for the rest of the world to buy?

  • ORVILLE SCHELL:

    Well, I think, you know, there were a lot of people stampeding into the market, very unsophisticated buyers.

    And, clearly, this is going to hamper their ability to continue to be really ardent consumers. We’re already seeing that. You know, car sales are down, a lot of people sort of — housing is a big problem. Some people were on margin.

    Huge amounts of borrowed money to go into the stock market and in some cases, putting houses up as collateral. So, there are going to be — certainly, are going to be ripple effects.

  • HARI SREENIVASAN:

    Does the government in China have a choice in not stepping in?

    I mean, if people, especially retail consumers who jumped into the market late saw huge losses — I mean, is there the threat of political instability, of people being frustrated with the government that rallied them on to buy?

  • ORVILLE SCHELL:

    Well, clearly, the party and the state felt that they were under threat if the market continued to tank. But, you know, this is again this anomalous situation where it’s sort of the pottery barn, you break it you own it.

    So, I think the party in a sense took ownership of the market whereas in most countries, stock markets are not considered the providence of the state or the government.

  • HARI SREENIVASAN:

    All right. Orville Schell of the Asia Society, joining us from Boston today — thanks so much.

  • ORVILLE SCHELL:

    Pleasure.

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