Good morning, Quartz readers!
The past month’s dramatic nosedive of Chinese stocks made for gripping headlines. So did this week’s even more dramatic rescue by the Chinese government. But strip away the rollercoaster clichés and the big, scary numbers, and you’ll see them for what they are: a distraction from a slower, more baroque kind of tragedy.
The show-stealer, margin trading—the use of borrowed money to buy stocks, which helped caused the crash—is a case in point. There is now likely around 3 trillion yuan ($480 billion) of such money, but it’s a small fraction of a debt overhang that some estimates put at $30 trillion. As for systemic risk, China’s stock market is actually a tiny part of its financial system. In the first five months of 2015, more than three-quarters of total financing came from bank loans, compared with just over 4% from the stock market. Only about 91 million individuals have accounts, about 7% of the population (and many retail investors have multiple accounts).
China’s other debt woes, while as significant, are much less sexy. Local government debt restructuring? Yawn. Insurance sub-debt? Meh.
Sexy or not, all these things are the symptoms of a larger, more opaque, and more pernicious disease: the refusal by China’s leaders to start shifting wealth from the state to households. As they dawdle, debt metastasizes throughout the economy, strangling the flow of capital to healthier parts. The recent market chaos is a sideshow to this larger debt drama. However, it’s also its after-effect: the consequence of capital having nowhere else to go.
What makes China’s reaction to the stock-market chaos worrying is that it exemplifies the government’s approach of treating flare-up of debt disasters on a malady-by-malady basis. Urging people to gamble on stocks doesn’t create genuine, sustainable value. What it does do is suggest that Beijing doesn’t really know the difference.—Gwynn Guilford
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