Chinese President Xi Jinping owes his central bank governor a debt of gratitude. Last week looked to be ending on a downbeat note as the much-heralded launch of the Shanghai-Hong Kong stock exchange link seemed to have fizzled. Rather than rush to bet directly on China's growth story for the first time, investors bought up less than a quarter of the link's stock quotas.
By Friday evening, attention had shifted to a People's Bank of China rate cut, the first in over two years. Just as the Bank of Japan cheered the world on Oct. 31 with its own stimulus move, the PBOC's bombshell refocused attention on attempts to stabilize the world's second-biggest economy. Now all anyone wants to talk about is when China's central bank will intervene again, not why the exchange link has turned out to be such a dud.
The latter may be the more important question. There's little doubt that Governor Zhou Xiaochuan's shock-and-awe move was the right one. Given China's public debt burden and default risks among state-owned enterprises, a looser monetary policy makes sense. But Zhou is merely treating the symptoms of China's troubles, not the underlying causes. Until Xi addresses China's structural weaknesses, foreign investors will have good reason to steer clear of the equities on offer in Shanghai.
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