Before the most recent midsummer stock market turmoil in China, stock trading among Chinese investors had reached a fanatic pace. China has 90 million retail investors and almost all of them are active traders. According to the Wall Street Journal report , "The total value of China’s stock market is still less than half that of the U.S. market, but the trading volume on many recent days has exceeded that of the rest of the world’s markets combined...virtually the entire market inventory is changing hands every month." Why do Chinese investors trade so frequently? Their quick turnover reflects the fact that Chinese people do not trust each other, nor do they trust Chinese businesses and the Chinese government.
This lack of trust across all levels of Chinese society is an ugly legacy of Chinese Communist Party's 30-year rule from 1949 to 1979. This three decade time span was the darkest period in China's three-thousand-year history. Wave after wave of political campaigns and radical social and economic experiments not only were responsible for millions of Chinese people's deaths, but also brought China's economy to the brink of bankruptcy: by 1980, China's GDP per capita was only $193, worse than Bangladesh's $219. In addition to unprecedented human suffering, the three decades' rule by Chinese Communist Party also created a long-lasting trust deficit in China.
Why don't Chinese people trust each other? Chairman Mao and his communist cadre had long held the belief that in order for the Communist Party to have absolute control of Chinese people, they had to break down the close ties within families and communities. During the Cultural Revolution, family members, neighbors and friends were forced to betray one another by becoming government informants and tell on one another's private thoughts, conversations and deeds to authorities. As a result, the traditional tight-knit communities and warm hospitality among Chinese people disappeared. Everyone became fearful of one another and stopped trusting one another. George Owell's 1984 paled in comaprison to Chinese people's real life experiences.
The distrust among people is very evident today. My parents told me that if someone falls on the street, no one dares to help him up because bystanders are worried about being scammed into a lawsuit. The lack of trust among people extends to their investing behaviors. Chinese investors have low confidence in China's stock market, so they always have a foot half way out the door when investing. As soon as one investor starts selling, everyone else wants to get out of the market too because they believe someone must know something but not telling the truth, so no one wants to be played as a fool. When everyone tries to head for the exit at the same time, Chinese stocks tend to experience very big swings in a short amount of time. For example, Solar-panel firm Hanergy saw its stock price plunge 47% in one hour on May 20, 2015.
Why don't Chinese people trust Chinese businesses? A quick survey of China's businesses will find counterfeit products everywhere. Product safety and quality seem to be an after-thought. From tainted baby formula to cooking with recycled oil collected from sewers, many Chinese businesses show that they are willing to cut corners to make short-term profits, while caring less about their own long term reputation and customer satisfaction. Contract law is a paper tiger and is rarely enforced. Chinese businesses also tend to give overly optimistic growth forecasts, while omitting any negative news. Consequently, Chinese investors also adopted the short-term view on companies they invest in. It is a well-known fact that Chinese investors do not invest in the stock market, they play the stock market like a slot machine. They generally avoid holding a Chinese company's stock for too long because that company may not be there tomorrow and no one wants to end up holding a worthless security.
Why don't Chinese people trust their government? Once upon a time, Chinese people did entrust a great deal of their wellbeing to the Communist government. They believed in the Communist Party's slogan of "peace and prosperity for everyone", helped the Communists defeat the Nationalist Party during a brutal civil war and founded the Communist China in 1949. Even during the height of the three-year famine from 1959 to 1961, most Chinese people continued to support the government because the government propaganda kept informing people that they were lucky to live in Communist China, while people in the West, especially in America, were destitute as a result of exploitation by evil capitalists. Chinese people accepted this lie at face value because they lived in isolation, without any connection to the outside world. However, the economic reforms in the 1980s reconnected Chinese people with the outside world. When information started flowing, many of Chinese had a rude awakening: people in the West didn't live in destitute situations; instead, we were the ones being exploited. Once people realized what a big lie the government had told them for three decades, there is no turning back. The success of economic reforms improved people's lives, but also affirmed that communism is a farce that even Communist Party members don't believe any longer.
Today's Chinese people may be the most cynical in the world. They do not trust anything government says or does. On the other hand, the Chinese government has done surprisingly little to earn back people's trust. For example, everyone who has been to or lives in Beijing can testify that its air quality is awful. Yet the Beijing government continued to report good air quality readings until the U.S. embassy in Beijing started tweeting its own daily air quality reading. Beijingers developed a habit of checking the U.S. embassy's daily air quality tweet (through a third party app to circumvent the government's firewall because twitter is banned in China) first thing in the morning and plan their day accordingly, while ignoring Beijing government's rosy forecast.
Chinese people not only do not trust any number that government reports, they also have zero confidence in China's justice system. So much so that over 100,000 Chinese signed a petition on the White House website in 2013, asking the Obama administration to investigate a Chinese government official's daughter who lives in the U.S. and who allegedly poisoned her college roommate in China.
The Chinese government is the largest investor in China’s stock market. Chinese investors will only invest in the stock market when they know that Chinese government has skin in the game. The recent mid-summer sell off was largely caused by investors’ concern that the Chinese government might reduce its backing of the market. Since Chinese people do not trust the Chinese government, any rumor about the government’s intention or perceived action is enough to push investors to exit.
After the recent stock market crash, Chinese government tried to stop the further decline by deploying Maoist actions such as ordering security firms to only buy, not sell stocks, and threatened to arrest anyone who attempted to sell. These are hardly trust-building measures. With low confidence in their government, Chinese people voted with their feet. Almost everyone I talked to, from acquaintances, street vendors, to government officials, want to get rich quickly (many are willing to take questionable means to get there) so they can leave China one day. They are following the path that Chinese elites have already taken. Shanghai’s Hurun Research Institute, reported in 2014 over 64% of China's millionaires and billionaires were either emigrating or planning to do so. It is an open secret that wealthy Chinese and government officials are sending their children and spouses to live abroad in record numbers. China has become and will continue to be the top country to export students and immigrants.
Unless the Chinese government can fix its trust deficit, no amount of money will save China's stock market and enable China to continue to grow the economy in the long run. What can Americans learn from China's experience? We as a country face our own trust deficit. A Gallup poll showed that only half of Americans trusted the government to solve domestic problems. Lack of trust probably can also explain why anti-establishment presidential candidates are riding high in the polls. From people to government, we need to address our own trust deficit head-on. Because trust is not only the core of a society’s moral fiber, but also the foundation of a free market economic system. As Frederick Douglass said “The life of a nation is secure only while the nation is honest, truthful, and virtuous.”