The debt, the stock market and the state-owned enterprises. The sources of chaos on the Chinese financial markets

Abstract:

The government’s extensive programme for stimulating the economy enabled China to maintain high economic growth after the global financial crisis in 2008. However, this success came at the price of a number of negative economic phenomena and the consequences they had were the major challenge for the government. The vast programme of investments in infrastructure, construction and fixed assets, which was the main source of economic growth over the past few years, caused a rapid increase in China’s debt from 158% of GDP in 2007 to 282% in 2014. Along with the local governments in charge of implementing the programme, the Chinese sector of state-owned enterprises (SOEs) was heavily burdened by the stimulation policy. The sector’s profitability fell, its indebtedness increased and management problems were revealed.

The ‘mixed ownership reform’ put forward by the new Xi Jinping government was expected to respond to these challenges, including by improving the financial condition of the SOEs sector through restructuring and the sale of minority stakes in companies. To implement this plan, with private investors playing a more active role, the Chinese leadership needed well-developed markets with sufficient depth. This was one of the reasons why the government launched the campaign promoting investments on the stock exchange which gave rise to the boom on the Chinese stock market in the middle of 2014 which ended one year later with a series of price falls and the imposition of strict administrative supervision over the Chinese stock exchanges.