China’s control issues

Wang Xiaolu reads a prepared statement in front of China’s state media. His low voice, downcast expression, and the dark circles beneath his eyes reveal a man fatigued. The journalist from the influential financial magazine, Caijing, apologizes for the July 20^th, 2015 story he authored. He confesses to using “private information obtained through inappropriate sources” and his own “subjective judgment” to write a story that brought “big losses to the nation and investors at such a sensitive time.” He says he regrets this “criminal act” and given his one-week detention and the look upon his face, we suspect he is telling the truth. However, one gets the distinct impression that this “confession” was not his idea.

In recent months, the Chinese government has punished close to 200 people for spreading false rumours related to the stock market and a deadly explosion at a chemical plant in Tianjin. Like many stories coming out of the Chinese media, it is difficult to ascertain exactly where the truth lies. While Chinese officials would have us believe that these individuals, consisting mostly of journalists and brokers, are “malicious” storytellers seeking to capitalize on a moment of weakness, perhaps they are simply individuals whose job or point of view happened to conflict with the interests of the state.

No matter where the truth lies, one thing is clear: parading these individuals like naughty school children in front of the nation may send a strong message domestically but internationally it does little to assuage investor concern. Rather, it raises questions around how bad the situation in China is if the Chinese are compelled to make such a public display.

Two Approaches

When confronted with a negative force, such as the market downturn in China, there are generally two main approaches to deal with it. The first is to attempt to control it; to match force with force, and to display strength; to be unyielding against the chaos at your door. This is the approach that emphasizes clamping down, rigidity and creating new rules. And for this approach to be successful, it requires you to be decisively stronger than whatever force you face. Imagine the rigid oak standing inflexible in the wind.

The second approach is to bend with the force in order to become resilient to it. Paradoxically, rather than standing firm to be strong, one becomes flexible; yielding to whatever energy unfolds in order to channel it in a positive direction. This is the approach that underlines many forms of martial arts, which seek to use an opponent’s force against her, and is a major component in the philosophy of Daoism. Imagine bamboo that bends in the wind.

Both approaches can work well at different times. Sometimes, a reaction of strength is what’s necessary, while other times, the more nuanced Daoist reaction delivers the best outcome. The key is to understand when each approach is most appropriate. Unfortunately, the first approach is often our default reaction, but is often not the best one for creating long-term resilience.

Control vs. Resilience

China’s reaction to recent market volatility is illustrative of the command and control approach. In response to recent falls in its stock market and heightened volatility, China reacted by exerting greater control: they jailed “malicious” short sellers, attempted to outlaw major shareholders from selling positions and have generally done anything and everything to force the market to stop behaving in an undesirable manner. In short, they tried to make markets submit to their will. But it is unclear whether markets can or will conform in this manner and China’s controlling actions may be doing more harm than good.

Let’s imagine that every time your child hurts him or herself, you narrow his or her freedom. Soon, there would be no climbing, running or playing… there would be nothing that would risk physical or emotional harm. Technically, your child would be safe in the near-term. But would they be resilient in the long-run? Would this series of decisions, each one made with good intent and with the safety of your child in mind, result in a self-sufficient, emotionally resilient adult capable of handling the challenges of life? Or would it set them up to crumble later on in life at the first hint of adversity?

The tighter grip is not necessarily the stronger one. Sometimes decisions that give us control in the short-run ultimately undermine long-term resilience. China may think that these moves to increase control are helping but that is not necessarily the case.

If recent events in China teach us anything, it is that there is a difference between control and resilience. Historically, when governments try this hard to control markets, the control they seek has already been lost.