Renminbi banknotes are placed on a bank staff's table in a bank in Lianyungang, east China's Jiangsu province in this file photo.AFP / Getty Images
The market bears are chasing the Chinese dragon and the poor beast is flightless, running ragged, its flaming breath quenched, while the emperor in Beijing is powerless to protect it.
On Thursday, trading on the Chinese stock market was halted after 15 minutes of business when the index plummeted by 5 per cent. Since the beginning of the year it has lost 12 per cent and Chinese investors are desperate to get their money out of stocks while the government is struggling to prevent a rout. Another set of restrictions on share selling by investors with large holdings has been imposed to continue a six-month hand-cuff due to expire on Friday.
The Chinese government is believed to have spent hundreds of billions of dollars propping up the stock market after the rout last summer when the index fell by 45 per cent. Now, a new panic, that the government will devalue the renminbi, is provoking capital flight and any Chinese person who enjoys the luxury of a dollar bank account is getting money out before the feared currency Armageddon.
George Soros, the fund manager, who made a billion in 1992 betting that the Bank of England would abandon its currency peg and devalue sterling, reckons it's all over. He predicts another financial crisis, caused by weak emerging markets, commodity price collapse and China's stumbling efforts to change economic direction.
You might think the aging hedgie's prognosis of doom is excessive when you consider that China has over $3.3-trillion in currency reserves. However, the money is draining like a sieve. According to Reuters, China lost $513-billion in foreign exchange reserves in 2015, the biggest ever decline with a $108-billion outflow in December alone. The panic stems from the growing realization among some analysts and investors that Beijing might actually run out of dollars trying to prevent a run against the renminbi and the stock market, as well as the bad debts of its banks and the shadow lending institutions.
What we may be seeing is the endgame of Beijing's big experiment: the attempt to run a command and control authoritarian system over a country that is becoming more and more integrated into global markets. Consider the widening gap between China's offshore renminbi market, based in Hong Kong, where foreign investors can freely trade government bonds and the more tightly controlled onshore market. The gap between the value of these two currencies as measured against the dollar has widened to a record 2 per cent, suggesting that confidence in Beijing's efforts to prop up the Chinese currency is weakening.
Underlying all of this anxiety is worry that China will not be able to make a smooth transition from export-driven manufacturing to a more consumer and service-oriented economy. There is widespread distrust in China's official statistics, notably its estimates of economic activity. Lombard Street Research reckons that China's real rate of growth is less than 4 per cent, well below official figures of 6-7 per cent. The optimistic interpretation of the current turmoil is that the currency slide should be welcomed, a reflection of weakening industrial investment. China will buy fewer commodities, oil prices will stay lower, a boon for the world (except Canada) and a weaker currency will make China more competitive.
The bears, however, see a financial crisis emerging with Beijing struggling to reflate a bursting credit bubble with diminishing amounts of liquidity and a huge offshore debt mountain. It will be astonishing in the circumstances, if a bank such as HSBC, ever carries out its threat of relocation to Hong Kong. (The British colonial lender is fed up with U.K. taxes and European regulation). Instead it should be watching the behaviour of investors in Shanghai.
The real question is not whether China is stumbling as it chokes its steel mills while urging families to spend. The problem is whether you can transform a totalitarian society into a real market economy where consumers make free choices with their own lives. In a recent exhibition of his work at London's Royal Academy, the Chinese dissident artist Ai Wei Wei spread 150 tons of steel rebar across the floor.
The steel came from the ruins of the 2008 Sichuan earthquake where the artist retrieved twisted bits of metal from the ruined walls of schools where corrupt contractors and officials had used substandard materials. Ai Wei Wei had each of the thousands of bars straightened painstakingly by hand and laid out beneath a list of the five thousand school children buried in Sichuan's concrete tomb.
From the artist's perspective, the task for China's leaders is now very clear: to straighten that which is crooked. Investors might say the same.
Carl Mortished is a Canadian financial journalist based in London.