Thursday, 20 June 2024

China goes on damage control—yet again

5 min read

By Research

China welcomed the new year with yet another bloodbath that it has seen too much of in 2015. But unlike the August 2015 sell-off that was sparked by small jittery players, this time around, macroeconomic fundamentals are making the bears return, and global stock markets are left cowering.

December ended for China's stockmarket with a nearly 8% drop that did not go unnoticed as the year drew to a close. And if anyone did miss December, the 6.9% drop in the Shanghai Composite index, and the 8.2% fall in the smaller Shenzhen Composite in January that pushed trading to be halted twice, the second for the remainder of the trading day, proved the new year party is indeed over. The $6.5 trillion Chinese stockmarket lost $590 billion on January 4.

Asian markets reeled the most. The Kospi skidded 2.2%; the Hang Seng Index fell 2.7%; and the Nikkei dropped 3.1%. This however, was far tamer than the declines last summer, when major Asian indexes plunged around 40% before officials stepped in. That time, the Chinese stockmarket lost $5 trillion.

In the US, the Dow, the S&P 500, and the Nasdaq were all lower by more than 2% shortly after the open.

Individual Chinese investors drive more than 80% of trading, and their sell-off in August largely caused the Black Monday stockmarket crash. The WallStreetExaminer points to rampant speculation and the liberal buying of equities on margin. Today the causes were more than frightened individual investors but weak manufacturing data and a falling renminbi. A lock-up period that has prevented institutional investors from selling was also coming to an end, which increased concerns.

As in August when the government stepped into the equities market by implementing suspension of trading beyond a critical band, policymakers again revived market intervention on January 5, a day after the first bloody trading day of 2016, as state-controlled funds bought equities.

Moreover, the China Securities Regulatory Commission signaled that a selling ban on major investors will remain beyond the 6-month lock-in period. In July, a ban on selling shares was implemented, which was supposed to be lifted on January 8.

China’s latest efforts to rescue its stockmarket are driving away some of the world’s biggest investors, and private analysts rather than government figures are increasingly being used as bases for the real state of the economy. While China’s manoeuvres may stabilise the market temporarily, they are unnecessary because intervention creates price distortions and fosters moral hazard. In 2008–2009, the Federal Reserve resorted to ad hoc rescues like the Fed’s efforts to bail out AIG during the global economic crisis. Realising the folly of the move, the Fed in November 2015 rescinded its “too-big-to-fail” policy following Congress’ demand that the central bank rescue only the broader financial system instead of individual companies.

In Japan, the Bank of Japan (BOJ) is intervening in the markets in a different way. In order to stimulate the economy even after zero interest rates that had fattened corporate purses failed to stimulate investment and consumption, the BOJ is scheduling to purchase exchange-traded funds that invest in Japan. This openly disclosed intention for April 2016 at least does not mask macroeconomic conditions in the way the Chinese government’s moves are perceived to whitewash its economic fundamentals.

China is still the second strongest economy in the world (although we project India to grow faster than China in 2016, as India had already grown faster than China in Q1 2015). China should take down all remaining vestiges of secrecy during its years as a closed economy and very simply, let the markets decide.

Keywords: China, RMB, IMF, Black Monday, India, Federal Reserve
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