Troubling Lessons in China’s Crumbling Stock Market
By Alex FrangosJuly 5, 2015 9:23 AM
It is easy to dismiss China’s stock market as nothing but an old-fashioned speculative bubble. But the government’s direct involvement in pumping it up, and its failure to keep it aloft, should have investors concerned about China’s ability to control even more consequential markets.
Chinese stocks crumbled another 6% Friday, despite the government throwing everything but the kitchen sink at engineering a rebound. In fact, it did throw in some kitchen sinks, telling investors they can now use apartments as collateral on margin loans.
The government upped the ante again Saturday, involving itself in an audacious plan by the country’s largest brokerage houses to institute a $19 billion stabilization fund to prop up stock prices. Such “price-keeping operations,” as the Japanese called similar moves in the early 1990s, are quixotic at best, and at worst, signal a panic mentality has infected China’s top decision makers. Regulators also suspended initial public offerings to preserve liquidity in the market.
Other measures over the past week include an interest-rate cut, a loosening of bank-lending and margin-lending conditions, rule changes allowing pension funds to own stocks and a powerful state investment fund buying exchange-traded funds.
So far anyway, what’s resulted is a market that has lost more than a quarter of its value in 13 trading days.
China gets all sorts of credit for managing its economic boom over the past three decades. But promoting an equity market bubble—including vocal cheerleading in state media—was a clear policy mistake. It is a reminder that China’s reputation for omnipotence in economic matters is hardly unassailable.
Similar mistakes handling the economy’s deleveraging could prove more devastating. A campaign this year to clean up local government debt turned out to be insufficiently thought through. Beijing had to walk back key elements and supplement the program with a bailout through a central bank bond swap program.
Another area where investors have come to rely on Beijing is the currency. Even as it professes to let market forces play a larger role, China keeps a firm hand on the yuan with daily exchange rate setting and periodic market interventions.
So far this year, the yuan is virtually unchanged against the dollar, partly to project stability as China lobbies to gain inclusion in the International Monetary Fund’s special drawing rights quasi currency, and as it seeks to internationalize the use of the currency among its neighbors.
But the weakness of the euro and the yen means that on trade-weighted, inflation adjusted terms, the yuan has strengthened 13% over the past year, according to the Bank for International Settlements. Against this backdrop, the yuan would probably be falling against the dollar if left to its own devices.
While the chances of a currency unraveling are remote, Beijing’s ability to withstand the pain of a strong yuan in the face of a sluggish economy may necessitate a change in tack when investors least expect it.
Just because China has had success controlling market forces in the past, doesn’t mean it always will.
Write to Alex Frangos at alex.frangos@wsj.com
No comments:
Post a Comment
Thanks for commenting. Your comments are needed for helping to improve the discussion.