Working at the Chinese stock exchange can’t be a bad job.
You head into work in the morning, the market promptly crashes, and you get to go home early and put your feet up.
Just this morning, the market slammed down 7% within less than half an hour of the open. Under the new “circuit breaker” rules, it was time to pack things up.
You think I’m exaggerating for effect. But here’s a quote from Bloomberg from one Beijing analyst: “All of us are talking about getting off work early today and we are happy. This is the shortest trading day.”
It’s an ill wind, I guess. But other than a day off for China’s City workers, what does the ongoing crash mean for the rest of us?
The problem with markets is that you can’t control them – that’s the point
China’s problem right now is that they’re not very accustomed to this free markets stuff.
Markets are tricky. They sometimes – maybe even often – do things that you would rather they didn’t do. And if you try to prevent them from doing it, they tend to do it even more.
Take this circuit-breaker nonsense, for example, where you shut the market for the day after it’s fallen by 7%. A moment’s reflection should be all it takes to realise that this is not a good idea.
The Chinese stockmarket has already made a double-digit loss since the start of the year. So what’s your average investor there thinking right now?
If they had their heads screwed on and the market had been allowed to keep falling, they might be thinking: “Hmm. Maybe this is a buying opportunity. Or maybe it’s a chance to pick up something from my watchlist on the cheap.”
But that’s not what’s happening. Instead, markets have been shut before they’ve been allowed to find the level at which the buyers start jumping in. So all you’ve got now potentially is a queue of sellers waiting for the chance to get out.
So even the most rational investors must be feeling the stress. And if they are, then I’ll tell you what the average person is thinking. They’re thinking: “I’d better get my sell orders in now before they shut the flipping market down again tomorrow”.
The “authorities” should just let the market do its thing, find the level it’s happy with, and then the selling pressure would abate. By trying to prevent the process, it just builds up the tension.
But then, China is hardly unique here. No one wants markets to do anything but go up. Look at all the short-selling bans we saw in developed markets during the financial crisis. Look at the global central bank “put’. So China has hardly been given a good example to follow by the paragons of capitalism in the West.
Anyway – what’s next?
This is all about the currency wars
As I’ve said before, this boils down to currencies. This is going to be a major battleground this year.
The key problem is that the US dollar is getting stronger. That’s derailed emerging markets generally. But it’s a particular problem for any country that has tied its currency to the US dollar. That includes China obviously, but also others like Saudi Arabia.
Having the yuan (or renminbi) tied to the dollar was fine when the dollar was weak. It’s not fine now that the dollar is getting strong.
I’ll keep this as simple as I can.
If your economy is struggling, you generally want a weaker currency. It makes your economy more competitive, because you look cheap compared to global rivals. So China wants a weaker yuan.
And that’s exactly what it’s getting. The yuan is falling fast. Trouble is that right now, everyone wants a weak currency, because everyone’s economy is a bit fragile. And the worry is that if China lets the yuan weaken too much, it’ll set off yet another round of currency devaluations across emerging markets in particular.
That’ll mean a) import demand from that region will drop (because consumers won’t be able to afford imports), and b) the price of exports will get cheaper – exporting deflation, basically.
In short, we’re looking at another deflation scare.
This all leads to looser monetary policy
However, beyond the uncertainty of how we get from A to B – what might blow up in the process? It’s hard to see exactly why markets are panicking quite so much about this.
Why? Because at heart, the authorities are only doing what markets have been loving for the past six years or so. The Chinese want a weaker currency because that equates to looser monetary policy.
And believe me, if there’s a genuine deflation scare, the central banks of the West will take full advantage. The US Federal Reserve decided against raising interest rates in September last year because they were explicitly worried about China crashing.
Well – things have only got worse since then. The Fed will be glued to this. And once it gets nerve-racking enough, they’ll start pulling back from their promised rate rises, and before long, the talk will turn to “when will rates peak?” and then “when will rates fall again?”
Meanwhile, China’s currency and markets will find a more comfortable level – either the painful stop-start way, which the authorities are currently pursuing, or more rapidly – and that’ll leave it in a better position for the future.
The main thing that would get me genuinely concerned about China is if it changes direction and decides that all this market stuff isn’t a good idea after all. That would be very bad news for the long run. But otherwise, I’m still comfortable with the idea that China is a good bet for the long term.
We’ve got a lot more on China in our first issue of the New Year, out tomorrow.
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