Wang He: If Another Stock Market Crash Occurs, Can the CCP Continue to Rule as Usual?

On December 24, 2023, a pedestrian walks past the Bank of China Tower in Central, Hong Kong. (Guo Weili/Dajiyuan)

[October 22, 2024] On September 24, the People's Bank of China announced the creation of two new structural monetary policy tools to support the capital market: the first phase of Securities, Fund, and Insurance Company Swap Facility (SFISF) worth 500 billion yuan, and 300 billion yuan for stock repurchase and refinancing loans. This marks the first time in CCP history that such measures have been implemented.

Following this announcement, the A-shares surged, with the Shanghai Composite Index climbing 1,000 points in just over a week, reaching a high of over 3,600 points. However, the A-shares market has long been referred to as a "junk stock market." On October 9, the A-shares experienced a rollercoaster drop, with the three major indices all falling, and stockholders lamenting. The market continued to decline, and by October 21, the Shanghai Composite Index closed at 3,268.11 points, 400 points lower than the previous high.

It’s important to note that the spike in A-shares was not directly caused by the central bank's two new monetary policy tools, but by the pent-up speculative and investment desires in society, which were triggered by the central bank's policy announcements. In fact, the two tools were not implemented until October 10 and October 17, respectively.

The authorities were surprised and displeased by the stock market surge. What they desired was a "long-term bull market," hoping for medium- and long-term capital inflows. However, many investors hastily redeemed wealth management products from banks, transferred large savings certificates, and even engaged in "borrowing to invest in stocks" (such as using consumer loans for stock trading), which posed great risks.

On October 8, the central bank's official media outlet, the Financial Times, reported that financial regulators had issued guidance to commercial banks, strictly prohibiting credit funds from flowing into the stock market. Within three days, more than 30 small- and medium-sized banks issued warnings. Some large banks also began making statements. On October 18, at the 2024 Financial Street Forum Annual Conference, Central Bank Governor Pan Gongsheng clearly stated that credit funds must not be illegally funneled into the stock market, marking a clear regulatory red line.

However, once speculative desires are unleashed, they are difficult to rein in. When such desires combine with the distorted system of A-shares and the authorities' misguided policies, disaster becomes inevitable. This explains why China's stock market experiences a crash every few years (based on the definition of a crash as a drop of over 20%, there have been ten stock market crashes in the first 20 years of this century, as discussed in my previous article, "After So Many Stock Market Crashes, Investors Will Finally Awaken").

The distortions in the A-shares system are well-known. Here, I will briefly discuss some issues with the authorities' related policies, using the newly created monetary policy tools as examples.

First, the Securities, Fund, and Insurance Company Swap Facility (SFISF) allows qualified securities, fund, and insurance companies to use assets such as bonds, stock ETFs, and CSI 300 constituent stocks as collateral to swap with the central bank for high-grade liquid assets like government bonds and central bank notes. While SFISF bears some resemblance to the U.S. Federal Reserve's Term Securities Lending Facility (TSLF), both allowing "bond-for-bond" swaps without large-scale base money injection, their purposes differ. TSLF was created during the U.S. subprime mortgage crisis to alleviate liquidity pressures on financial institutions, whereas SFISF aims to boost the stock market. The two also differ in terms of how the funds are used, the types of collateral, terms, and collateral ratios. More importantly, the U.S. stock market is well-regulated, and the Fed's use of TSLF had positive effects on the U.S. market. In contrast, the A-shares market is highly irregular, and the effects of SFISF are hard to predict. Additionally, stock market and bond market funds often operate like a seesaw—if SFISF directs funds to the stock market, it could negatively impact the bond market, leading the authorities to juggle both markets unsuccessfully.

Second, stock repurchase and refinancing loans are common in international markets. For example, Apple has repurchased $700.61 billion in common stock since early 2013, reducing its outstanding shares by 42.24%. If Apple had not spent a cent on stock repurchases over the past 11 years, its earnings per share over the past 12 months would have been just $3.87, compared to its actual level of over $6.50. However, like Apple, international companies typically use their own funds rather than borrowed funds to repurchase stocks. If loans are used for stock buybacks, who bears the risks and losses? Moreover, the A-shares market is already rife with systemic risks.

As for major shareholders increasing their stock holdings, there’s nothing inherently wrong with this. However, one of the major issues in China's stock market is the dominance of single large shareholders, often holding 60-70% of shares, which has led to long-term governance issues. Some experts have long called for reducing major shareholders' stakes to below 30%. Now, the authorities are encouraging major shareholders to increase their holdings, which seems to be a backward step.

From the above analysis, it is clear that the authorities, facing an economic downturn, have placed their hopes on stimulating a stock market recovery (as evidenced by the People's Bank of China's press conference on September 24, which preceded the Politburo's meeting on September 26 to discuss economic issues, followed by a series of press conferences from the National Development and Reform Commission, Ministry of Finance, and Ministry of Housing and Urban-Rural Development). However, the stock market recovery relies on imported, superficial monetary policy tools, completely ignoring the deep-seated distortions in China's stock market and the public's strong speculative mentality.

Therefore, the authorities' policies to support the stock market will inevitably lead to intense market volatility, which will likely culminate in a stock market crash.

The most alarming prospect for the CCP is that, given the current economic landscape, if another stock market crash occurs, will the regime survive?

Looking back at history: the Qing Dynasty fell after the 1911 Revolution, which was sparked by the Wuchang Uprising. One key factor in the uprising’s success was the fact that the Hubei New Army had been sent to suppress the "Railway Protection Movement" in Sichuan, leaving Wuchang defenseless. The spark for the Railway Protection Movement was the 1910 Shanghai stock market crash, where the CFO of the Sichuan-Hankou Railway Company lost 3.5 million taels of silver in stock speculation. This, combined with corruption, political infighting, and policy disagreements (the "nationalization of railways" policy itself was not fundamentally wrong), stoked public anger. The authorities mishandled the situation, and revolutionary groups seized the opportunity to incite rebellion. The Railway Protection Movement thus became the prelude to the 1911 Revolution. In a sense, the domino effect triggered by the 1910 stock market crash led to the fall of the Qing Dynasty.

As Mark Twain said, "History does not repeat itself, but it often rhymes." If another stock market crash occurs (which seems inevitable given the current circumstances), the impact on the CCP could be similarly significant.

First Published by Epoch Times

Editor: Gao Yi