he disastrous Chinese manufacturing data released on Friday that caused Shanghai markets to fall off a cliff seemed as good a reason as any for Chinese authorities to act with additional stimulus. Apparently not.
The lack of cut to interest rates or reserve ratios from the PBOC sent Asian markets into a tailspin. The Shanghai composite fell 8.5%, that’s following a 12% decline last week and has now given up all of this year’s gains.
A change in the law announced on Monday to allow Chinese pension funds to invest in stocks may be a long term support for the market but has done nothing to avert short-term panic. Firstly, pension funds would be insane to invest in Chinese stocks when there are double-digit declines each week. Secondly, the Chinese stock market is predominantly retail investors who have lost faith in the government’s ability to hold up the share prices and are running scared.
The Chinese government’s intervention into stock markets has proven counter-productive. Forcing institutions to buy and banning them from selling has just added to the panic of retail investors who make up 80% of stock ownership in China.
China in the past eighteen months has been reminiscent of fables told about America during the 1920s before the Great Depression. Stories of taxi drivers and rice paddy farmers investing life savings into a stock market that was up 150% in twelve months was a disaster waiting to happen.
The irony is that the move to weaken China’s currency that precipitated the market rout is probably a positive for the Chinese economy. The problem is that China’s stock market has long since been divorced from the Chinese economy. The government blew up the bubble with promises of fiscal and monetary stimulus and by creating the connect scheme with Hong Kong, but the real economy is growing at its slowest pace in six years. Now it’s burst it by not making good on its own bloated promises.
There are a multitude of reasons the panic in China is spreading to the rest of the world, but at the heart of it could be that investors are starting to realise central banks are not infallible. The PBOC has spectacularly failed to stimulate the Chinese economy, Europe’s whole recovery is based on a lower euro which was just undermined by the yuan devaluation and the US is experiencing its slowest post-recession recovery on record, despite huge stimulus.
There will more than likely be a short-covering rally in the next few days but for the time being European markets are off the lows but still down on the day and US futures point to a huge drop at the open on Wall Street.
Futures suggest the:
will open 28 points lower at 1,942 with the
expected to open 296 points lower at 16,163 and the
121 points lower at 4,076.
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