Is China practising what it preaches on protectionism?

On the tenth anniversary of China's entry into the World Trade Organisation, there appears to be a role reversal. It is China who is lecturing the world against trade protectionism, instead of the Western world lecturing China.

But is the Chinese regime really practising its lectures from the lectern? In fact, the reverse seems true. If anything, the ‘openness' of recent years has given way to an insidious increase of state control.

Hemmed in by the ‘currency bill' passed in the US Senate, which slams China for holding down the value of the yuan, and the European Union launching a series of trade remedy cases against Chinese exports of tiles and bicycles, the need for total control has been on the rise.

Although China attracted foreign investment of $760 billion (Dh2.79 trillion), it is no longer keen on more dollar inflows. Neither has it renewed the generous incentives specially worked out for foreign investors.

Except for the very niche and high-tech sectors, there is no laying out the red carpet for foreign companies. A combination of anti-monopoly legislation has also prevented multinationals from buying into heavyweight domestic companies recently.

Complex tightrope

Chinese planners are increasingly looking inward and preparing for a protracted trapeze walk through the economy. Prolonged fragility of the global economy has forced them into a huddle, especially with regard to foreign funds.

According to the IMF's latest outlook on the Asia-Pacific region, the threat of capital outflows from the region is now high, as Western investors are likely to reverse the large positions they have built in Asian markets since 2009.

China, along with Asian economies, remain vulnerable to trade and market shocks due to the high degree of integration. The IMF warns that with further drop in global demand for Asian exports, foreign investors could retrench from the region.

As a quick fix solution, the government is now intervening to prop up the stock market after letting it fall for most of the year. With valuations reaching record low levels, China can't afford to leave its markets orphaned.

Soon after the bourses opened after the ten-day national holidays, stocks gained the most they had done in a year on the Shanghai Composite on optimism that the government will put its full might behind the market.

Largest shareholder

Central Huijin Investment, a branch of China's $300 billion sovereign wealth fund, bought shares in the four major state-owned banks to stabilise prices after the Shanghai Index fell to its lowest level in 30 months. Central Huijin is the largest shareholder of China's big four banks — Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China.

The purchase by Huijin not only triggered a short term rally, but also raised expectations that this will steadily stabilise stock prices. The investment body's interventionist role however is largely symbolic as it has been known to step in to stabilise the domestic stock market after the 2008 crisis.

The final rebound for shares will ultimately depend on fundamentals and the direction of monetary policies, but for now, Central Huijin's buying spree boosted buying sentiment.

Intervention

The Shanghai index has declined 18 per cent this year due to global financial turmoil. Allowing it to fall further will put the domestic property market at risk. This in turn is likely to threaten the banking system, triggering a crisis not dissimilar to the 2008 housing crisis in the US.

These fears make it essential for the government to support the share price of banks in order to boost market confidence.

The depressing trend was further arrested by significant policy support for small enterprises.

Last week, the government announced financial support and preferential tax policies for small companies reeling under severe liquidity crunch due to the nation's tight monetary policies. It will also be more tolerant of bad loan ratios for small company loans, an added pressure on banks. These decisions also brought instant cheer to investors.

But while the government may try to guide the ‘invisible hand of the market', all hopes will remain on durable and inclusive growth, decoupled from exports.

The writer is a freelance journalist based in China.

Stocks and trade