China remains optimistic as it adjusts to ‘new normal’

It is almost too hot in the sun in Sanlitun, Beijing’s upscale shopping and nightlife sector. Here a hefty percentage of the capital’s citizens, enriched by decades of dizzying economic growth, come to spend their leisure hours and their freshly minted renminbi.

Things have been a bit sluggish in Sanlitun over the past couple of weeks, although this is not down to the surprise devaluation of China’s currency, record losses on the country’s stock markets and prickling anxiety about the future of the world’s second-largest economy. Rather, Sanlitun has gone quiet because the area has had to close for rehearsals for a big parade to mark the 70th anniversary of the end of the second World War.

Also, some weeks ago a seemingly crazy xenophobe armed with a sword attacked a couple, killing a Chinese woman and badly injuring her French husband. The murders took place outside a branch of the Japanese clothes shop Uniqlo, where a couple previously filmed themselves having sex in the changing room – now an online favourite. It’s a busy part of town.

Despite record recent declines in the Shanghai and Shenzhen bourses, it is these events that are the actual talk of the Village mall. It seems that stock-market news has to be far more catastrophic before it can compete with a sword attack for public attention.

In the past week the Chinese stock market lost 23 per cent of its value in five days, sparking volatility on exchanges all over the world.

Although it recovered later in the week, it is far from settled, largely because economic growth in China seems to be slowing. The Chinese government says it is decelerating to a "new normal" rate of about 7 per cent a year, an enviable slowdown to most European countries.

“There are a few less people at the weekend, but I think that’s more to do with the incident outside Uniqlo, the attack,” says a man surnamed Zhang at the Apple Store. The shop is thronged with people inside as well as outside, where hustlers look for the packaging from newly bought iPads and iPhones, presumably to make pirate copies easier.

A middle-aged customer, who asks not to be named, says she had invested some money in stocks but not her entire savings. “So it doesn’t really affect me if I lose it,” she says, pottering among the displays. “I’m here to buy a MacBook Air.”

At the Starbucks around the corner from Uniqlo its manager, Zhao, says that everything is as normal. “There are still as many people coming here as before,” he says. “We don’t see any sign of a slowdown.”

It is the same story at the Adidas shop across the mall, where a sales assistant says that sales are buoyant: “We don’t see any economic slowdown here.”

Indeed, retail sales are still climbing, up 10.5 per cent from July compared with last year. And the services sector is thriving under the “new normal”.

Not all is rosy, however. Car sales, for example, are decelerating. One salesman at a foreign-car showroom says the reasons are more complex than just the economy.

“Our sales have gone down a bit this year,” he acknowledges, “but the main reason is a combination of the economic slowdown and the restrictions on number plates to cut pollution. I don’t think people are going for smaller cars, though; that hasn’t changed.”

In town to shop is Wang Na, from Dalian, in the south of Liaoning province. She is carrying a Calvin Klein bag. “Beijing has more choices for shopping,” she says. “I don’t see or feel any economic slowdown.”

Hard landing

There may be complacency on the street, but in the past eight weeks China has replaced Greece as the country that keeps international investors awake at night. They fear that the world’s second-biggest economy is growing by much less than the official target of 7 per cent this year, that the current transition period could disrupt global growth, and that China is in for a hard landing.

What a long, strange trip it has been. China has gone from being a huge country with an inward-looking economy, led by doctrinaire Marxist-Leninists who shunned overseas investment, to one that accounts for 15 per cent of the world’s gross domestic product, and is an engine for global prosperity.

Now it’s in trouble. The stock-market boom now ending saw the main Shanghai index more than double in the 12 months to mid June. About 20 per cent of the money used to buy stocks was borrowed, compared with about 2.5 per cent in the United States.

When the slide started many small investors were caught in the middle, and they sold their shares to pay back debts, causing the slide to pick up pace.

The number of Chinese owning shares is still small, probably about 3 per cent of the population, but broader fears about the economy are hard to shake off.

While much has been made of the losses sustained by the first-time investors or the innocent naifs entering the market with their life savings and getting burned, the one-percenters are also suffering.

On Monday Wang Jianlin, head of the property giant Dalian Wanda, saw €1.76 billion wiped off of his stake in the company, according to the Bloomberg Billionaires Index. When you factor in the €880 million lost on his Wanda Cinema Line stake on the Shenzhen stock exchange, he is down €2.64 billion, leaving him with a fortune of €27.5 billion.

All told, Bloomberg reckons that Asian billionaires have shed a fifth of their wealth in the past three months – and €47.6 billion in the past week.

Better than Bitcoin

Chinese investors were strongly encouraged to take part in the stock market. On April 21st a commentary in the

People’s Daily

newspaper, the official outlet of the Communist Party, urged investors to get into the market and rejected fears of a bubble because, the commentator said, A-shares were great Chinese companies, “not tulips or Bitcoin”. “If A-shares are seen as the carrier of the Chinese dream, then it has enormous investment opportunities,” the paper said, hailing an imminent bull run without end.

Many investors read the urgings of the Communist Party’s main organ as clear investment advice, and interpreted the tone as saying the government would intervene if things became difficult. And

, when things did get difficult, the government stepped in to protect the investors, as promised.

Caixin, a respected business website based in Beijing, has been critical of the government’s efforts to prop up the market through agencies such as the China Securities Finance Corp, which has played a central role in the government’s campaign to bail out the market, according to Caixin. “The message some investors took away from the intervention is that the government will always ride to the rescue when the market collapses. The moral hazard this created backtracks on progress that has been made over many years on investor education.”

Burned investors

The point about investor education is well made, and there are horror stories aplenty. One comes from a young woman, surnamed Feng, who invested in the market when things were good.

“In May and June I made 30 per cent profits, but now I’m down 63 per cent. I can’t afford to sell off the shares. All I can do is wait. Hopefully it will get better.”

Li Dawei, who works at Yuanhui Tianxia Financial Services, says the crash has come without warning. “It is difficult to say if the global situation affects China or if China affects the global stock market,” he says. “I think because China is becoming more important in the world, it could be the latter. It has affected us a lot – 40 per cent of our assets have disappeared.

“If history is repeating itself, and this is like 2008, it means the stock market will continue going down. We estimate that next year, in March, the market will return to normal, without being a bubble and without leverage and margin lending. So we will hold on and wait and see.”

The Global Times newspaper, which is published by the same group that publishes the People's Daily, sought to reassure the population about the link between the economy and the stock market.

“The combination of a plunging stock market and a downward economy has brought huge impact to society and reinforced the impression that the Chinese economy is in a severe situation,” it said. “The stock market is sliding, but the economy is not. The rule of the stock market is still hard to pin down, but the economy is under control.”

Wang Li is a day trader who also manages about a million yuan (€140,000) in a private equity fund mostly gathered from friends and family and aimed at longer-term investments rather than short-term aims.

“The value of this portfolio has gone down around 35 per cent,” he says. “It has affected me hugely. For example, I have to cut back on costs for lots of things, such as rent on my apartment.

“I think the market crashed because, at the beginning, way too much money went in. With the slowing down of the economy, people sold their stocks to avoid the risk, which caused the slump of the stock market. At the moment people are very pessimistic about the market.”

Long-term optimism

Wang says he is confident the government will come up with policies to help the economy. Earlier this week the government intervened to cut interest rates to stimulate the economy, although it did little to halt the stock-market slide.

“In the short-term, stocks might grow up a bit, but for a long run it will be going down. I believe it will be better eventually, and I am quite optimistic about it for the long term,” he says.

Like Wang, Chinese people in general are optimistic about the long-term prospects for the economy, but it’s hard to see how they have any other option. Certainly, as long as China’s remarkable programme of urbanisation continues, it’s difficult to imagine the economy slowing down significantly. Still, it remains to be seen how the “new normal” takes shape.