The monetary stimulus announced by the People’s Bank of China (PBOC) at the end of September seems to have achieved little. After two weeks of frenzied buying followed by a day of massive selloffs, the market rallies in Hong Kong and mainland China appear to be over. It is unlikely that the short-lived rallies catalyzed actual investments, improved the lives of Chinese citizens (most of whom do not own shares), or enhanced prospects of the real economy.
A much-anticipated fiscal stimulus that might boost domestic consumption has not yet materialized. Earlier this week, a press conference by the National Development and Reform Commission (NDRC) did worse than fall short of market expectations; the dearth of substantive measures that could have enhanced domestic consumption and private investment caused the Hang Seng index to fall by nearly 10 percent on the same day, wiping out most of the index’s gains for the year.
Perhaps the only thing more dramatic than the turbulence of Hong Kong and Chinese stock markets in recent weeks has been the mental gymnastics of China bulls and optimists as they try to explain the actions of a government prone to giving mixed signals, sudden reversals, and policy U-turns.
Recall for instance how the Chinese state abruptly swung from a strict zero-COVID policy to a de facto COVID-for-everyone policy at the end of 2022 – leading to the very dystopia that Chinese state media had, for the previous two years, mocked Western countries for. A few months later, the Chinese authorities brazenly declared that China’s COVID-19 policy had been “completely correct” even as they scrubbed references to the tight restrictions that had traumatized the economy for much of the pandemic.
When one tries to attribute intentionality and rationality to such dramatic policy U-turns, it is hardly surprising that the resulting “explanations” are a hodge-podge of implausible claims, non sequiturs, wishful thinking, and delusional optimism.
Before the monetary stimulus announced by PBOC three weeks ago, China bulls were saying that a stimulus was not only unnecessary, but also unhealthy for China’s development. They claimed that a sizable stimulus would undo the progress China has made in moving away from speculative investments mostly in real estate to a “high-quality” development model driven by advanced manufacturing and cutting-edge technologies. Deleveraging was framed as a necessary process, even a desirable one, as the economy unwound years of debt-fueled investments in real estate.
They also pointed to the United States as an example of how fiscal and monetary stimuli led to high indebtedness, an economy built on financial speculation and asset bubbles, over-consumption, and runaway inflation. By contrast, China was a model of financial and fiscal rectitude; it will not run the risk of reflating the bubbles that the authorities had successfully deflated in the last few years.
Fair enough, one might think. But when the PBOC did a volte face and unleashed China’s version of a monetary stimulus that included unprecedented measures to boost domestic equities, China bulls immediately applauded the moves even though intellectual integrity required the opposite. Their “explanation” now was that after stomping on real estate developers such as Evergrande and stabilizing the property market, the time was ripe for the authorities to ease credit conditions and pump prime the economy – starting with the stock market.
The stock market rally that followed the PBOC’s announcements was thus hailed as a sign of the Chinese economy roaring back to life, and as evidence that the naysayers who predicted that China would fail to meet its 5 percent growth target for the year were wrong. Any suggestion that the stock market rally would be short-lived was shot down. Similarly, concerns that the stock market rally might become a bubble were rubbished; Chinese equities, the bulls insisted, were still undervalued.
For China bulls, the stimulus announced by the PBOC marked the culmination of a highly coordinated series of policy measures taken to prevent “the disorderly expansion of capital” (the Communist Party’s favored justification for any crackdown on private enterprises), restructure the economy, and upgrade its technological and productive capabilities. The regulatory crackdowns of the last three years – on property developers, internet platform companies, private education, and others – were now framed as part of a well-conceived plan aimed at draining the economy of its excesses, even if that led to sluggish growth and falling prices.
In the (new) narrative of China bulls, the problems the Chinese economy has been struggling with the last two years – deflation, decline in asset prices, deleveraging, falling corporate profits – were not sacrifices in vain. Rather, they were the planned and intended consequences of China’s upgrading efforts.
As if all that was not delusional enough, these bulls confidently predicted that China would soon launch a big fiscal bazooka that would extend the stock market rally and catalyze a wider economic recovery – enabling China to hit the target of 5 percent GDP growth. But that fiscal stimulus did not come. Hong Kong’s stock market fell by over 9 percent on Tuesday because market expectations ran far ahead of what the the NDRC was prepared to do to spur growth.
At the heart of the eternal, but mostly unjustified, optimism of China bulls is their unshakeable belief that the Chinese state is exceptional. For the bulls, China’s leaders are unusually intelligent, far-sighted, and meritocratic; they formulate policies rationally based on science and evidence. It is a government for the people rather than one captured by vested interests.
Viewing the Chinese government through this prism of exceptionalism makes it hard for China bulls to imagine that the authorities might be unpredictable, capricious, and prone to sudden U-turns. Hence, when the policy reversals and U-turns occur, China bulls must construct elaborate and often implausible theories to “explain” them. Not doing so would cause too much cognitive dissonance.
The reality of course is that the Chinese state is not all that exceptional. Like the governments of most countries, it is often myopic and torn between short- and long-term goals; ideology and loyalty regularly come into conflict with rational, meritocratic decision-making; and there is a large gap between (legitimate) policy goals and the Chinese state’s capacity to achieve those goals. In short, the reason the China bulls often get it wrong is that the authorities they feel compelled to defend and justify are themselves often wrong.
There is also a deeper pathology behind an instinctive defense of whatever the Chinese authorities do. About a century ago, the great Chinese novelist Lu Xun explained China’s inability to modernize in terms of self-delusion, embodied by the title character in his short story “The True Story of Ah Q.” For Lu Xun, China’s malaise was not just the result of Western aggression or the West’s superior technologies. Rather, the roots of China’s malaise were found in a flawed “national character.”
Lu Xun’s writing gave birth to the concept of the “Ah Q mentality”: essentially an exaggerated form of denial, delusional optimism, and self-rationalization. In the face of defeat, rather than acknowledge his own shortcomings, Ah Q deceives and persuades himself that he is (morally) superior to his adversaries. No defeat or humiliation is large enough to undermine his unfounded and deluded sense of self-superiority.
Just as the Ah Q mentality held back China’s modernization a century ago, similar thought patterns are holding back the necessary reforms that would propel China into the league of developed countries. By denying the fact that China faces very real economic problems and by deluding themselves of China’s superiority, China bulls do far more harm than good for the country’s development.