It’s always amazing how the stock market pulls big surprises on those who should know better.
The momentous rise in share prices in the Shanghai stock exchange from mid-2014 to the middle of this year, when the composite index shot up by 150 percent, should have been a strong indication of what Alan Greenspan labeled “irrational exuberance”—the sign of an impending collapse of stock prices that are far above the real value of assets being traded.
But like Greenspan during the 2008 Wall Street crisis, neither Chinese investors, foreign investors, nor the Chinese government seemed prepared when the market cratered earlier this summer. The Shanghai composite index plunged by 40 percent in a few weeks’ time, triggering a global collapse of stock prices and forcing Beijing to intervene and buy up market shares—and, when that failed, prompting it to devalue the yuan.
Buoyed by a $585 billion stimulus following the US crash of 2008 and the European sovereign-debt crisis the following year, China had appeared to ride out the storm its Western trading partners unleashed upon themselves several years ago. It was only a matter of time, many analysts thought, before Beijing and the BRICS countries would replace the traditional economic hegemons as drivers of the world economy. This optimism proved short-lived.
Now, in fact, the Beijing stock-market collapse marks the deepening of a new stage in the contemporary crisis of global capitalism.
The Struggle Over Economic Strategy
When then-President Hu Jintao and Prime Minister Wen Jiabao launched China’s massive stimulus program—the biggest in the world in relation to the size of the economy—their aim went beyond providing temporary relief as the country’s main export markets in the United States and Europe faltered. The stimulus was intended to be the cutting edge of an ambitious drive to make domestic consumption, instead of exports, the center of gravity of the economy.
That plan made economic sense—not only because export markets were volatile, but also because over-investment in exports had left considerable underused capacity in the economy. It would place more purchasing power in the hands of the vast majority of peasants and workers, who had been disadvantaged by the priority given to export-oriented industries and profits. And politically, it would help China’s leadership fend off international complaints about the massive trade surpluses the country was running.
The problem was that the shift would also entail transforming the composition of winners and losers in the new China.