Hedgies collared in China crisis

EDITOR'S BLOG: The Chinese politburo is learning capitalism the hard way. Like the rest of us.

by Matthew Gwyther
Last Updated: 08 Jan 2016

You been indulging in any ‘rumour-mongering’ recently? Li Yifei, the head of Man Group in China apparently has, and, as a result, her husband hasn’t seen her for a few days. She is currently helping the Beijing authorities with their enquiries.

It’s rare that you will find sympathetic words in MT - or elsewhere for that matter - expressed on behalf of hedgies. They rank low in people’s sympathies. But this must be pretty scary. Ms Li, one hopes, knows how to look after herself - she is a kung fu expert, ex-stunt double in martial arts films and ran both MTV and Viacom in China.

The Shanghai Composite Index is now down 40% since its June peak. The opening-up of the Chinese stockmarket to retail investors buying on margin has backfired seriously, and those ordinary folk who borrowed money to purchase shares will be running very scared. Scapegoats must be found to excuse their unwise actions, and to detract attention from the realisation that even the all-powerful Chinese political machine cannot control the behaviour of millions of private investors. Hedgies are one current enemy of The Chinese People. (How on earth can you be permitted to bet on a share going down in China when everything must go up?)

Journalists are another. The financial hack Wang Xiaolu has also been arrested and after a few hours under a white light has confessed on China Central TV. ‘I shouldn’t have released a report with a major negative impact on the market at such a sensitive time,' he said. 'I shouldn’t do that just to catch attention which has caused the country and its investors such a big loss. I regret . . . [it and am] willing to confess my crime.'

To get this into perspective a UK equivalent would be the saintly, flop-haired Robert Peston being cast into a cell in Belmarsh when he first started expressing anxiety about the future of Northern Rock.

The Chinese government has spent most of this summer fire-fighting to maintain growth at 7%. It has devalued its currency, been buying up shares as the stock market plunged and generally trying to keep the state ship afloat. But much to its annoyance - and it's used to things happening double-quick when it makes a demand - the markets have shown a stubborn refusal to come to heel.  

What a surprise - capitalism’s animal spirits have a mind and will of their own. The point is the Chinese system isn’t a proper, free market as we understand the term because it’s only a market until it inconveniences the Communist Party or makes it look out of control. That would be very dangerous indeed. If The Party isn’t all-knowing and in control who knows what might happen? Some other organ or individual might claim to be wiser.

You cannot dare talk about this impotence. Typically last week you could find no coverage whatsoever of the stock market turmoil in China’s People’s Daily. It all reminded me rather of Stalin's approach to getting his way - I’m currently reading Simon Sebag-Montefiore’s excellent biography of the Soviet monster ‘the Court of the Red Czar’ which I heartily recommend. Untruths are airbrushed out and those who crossed him become Unpeople. 

The problem, however, in China is that the rules are never explicit. Things are opaque and the law is very flexible. You only know when you’ve over-stepped the line when you are take in for questioning by the authorities. They are new to this capitalism thing and make it up as they go along.  

Properly functioning market economies require transparency and the free flow of information. Markets can, as the small print never tires of telling us, go up as well as down. In this area China still has many rivers to cross. The Corbynistas of this world will protest, with some cause, that it’s all bent in the West, as well. We know that our markets are far from perfect. Libor, sub-prime and the misery caused by The Great Crash all show that. We also see how difficult -outside the US - the financial authorities find it to nail miscreants.

But in London Ms Li would have a lawyer and a free press plus internet to help defend her against an arbitrary and oppressive state. In Beijing she isn’t so fortunate.

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