The theme of starving the poorer countryside for the benefit of the wealthy cities hits an especially sensitive nerve. The fruits of China's boom have gone disproportionately to city dwellers and the country's coastal regions.
In 2006, Chinese government figures put annual per capita household income at $1,475 for urban households and just $450 per capita for rural households. That inequality has become painfully obvious because inflation, which hit a 12-year peak in February, has come crashing down hardest on China's poorest. Although overall inflation is running at just 8.7% annually, food costs soared 23.3%, according to the National Statistics Bureau. The price of pork, a staple source of protein, has climbed 63% since February 2007. The price of cooking oil has risen 41%.
Ham-handed publicityIt doesn't help stem public outrage that the government just doesn't seem to get it. In October, as pork prices were starting to soar out of control and stories about tainted food supplies were causing increasing worry, the government staged an elaborate public-relations event to showcase the special pigs that Qianxihe Food Group (branded as Lucky Crane in English) would supply for the Olympics. At 10 special farms, carefully chosen pigs were being raised with only the purest food, air and water. The pork, according to the China Meat Research Center, will cost at least twice as much as pork now on the market in China.
Think about how that goes over in a country that has recently witnessed deaths as crowds rushed to buy cheap cooking oil. This pork will be absolutely safe to eat, but most Chinese won't be able to afford it.
All this might not matter to overseas investors if the Chinese stock market wasn't looking so wobbly right now. Hong Kong's Hang Seng Index ($HSIX) is down 17.6% from the start of 2008. The more volatile mainland Shanghai market is down 25% since the start of the year. Recent initial public offerings haven't performed as expected: The March 10 IPO for China Railway Construction climbed 28% in its first day of trading in Shanghai. That's shabby compared with the 163% first-day gain for on Oct. 29.
What might be wrong with China's stock markets is, in part, a reflection of rising anger at the national government in the run-up to the Beijing Olympics.
Growing distrust of governmentThe government owns huge numbers of shares in what are nominally private companies. Roughly 88% of the shares of PetroChina, for example, are in government hands.
Through reforms introduced a few years back, millions of shares that were legally locked up can now be sold by the government and its various agencies. The faith among investors was that Beijing wouldn't do anything to tank individual stocks or the market in general by selling too many of these shares. The government would keep the float for these stocks tiny and thus ensure constantly rising share prices.
The government, as far as I can tell from the figures I've been able to find, doesn't seem to have broken faith with China's investors on this issue. I don't see any evidence of big sales of shares by government entities. But what we're seeing in China right now is a rising sense among investors that they really can't trust the government to do the right thing by them and a worry that the government may, whatever its intentions, not be the infallible manager of all things economic and financial that investors had been counting on.
A long, crucial to-do listThat's a fear that overseas investors should think about, too: China's government is about to try to slow runaway inflation while readjusting the value of the country's currency, keeping the economy growing at better than 8% a year, reducing income inequality and rebuilding some parts of the medical and educational infrastructure. Asking any government to handle all that without a slip is asking a lot.
It's a fear that the government isn't going to be up to it, rather than any evidence of a meaningful slowdown in economic growth, that is fueling the malaise in China's stock markets right now.
And the danger is that the Beijing Olympics will feed into that growing fear. Worried investors, of course, sell. And worried investors who have lost faith sell the hardest.