As I said yesterday, the Chinese stock markets aren’t finding a bottom expressly because of the actions of the Chinese authorities to prop them up. The editors of the Wall Street Journal remark:
International institutional investors have expressed skepticism about the Chinese stock market in recent days for this reason. MSCI Inc. punted on a decision to include mainland Chinese shares in its Emerging Markets Index in June, and the government’s response to the crash means it is unlikely to happen soon.
The botched intervention could even threaten the reputation of China’s pre-eminent financial center, Hong Kong. Through the Hong Kong-Shanghai Stock Connect system, stocks listed in one market can be traded on the other. Through the recent carnage, Hong Kong trading of Chinese companies remained more stable, perhaps because the scheme is so new that few mainland shares are held there. But in some future crisis, might Beijing freeze the positions of investors in Hong Kong to stem outflows?
Such questions have to be worrying Beijing’s many competent technocrats, who clearly weren’t calling the shots in recent weeks. The policy wheels turn slowly in Beijing, but the past 35 years have shown that after a few failures the Communist Party tends to come around to needed economic reforms. Here’s hoping that Party Secretary Xi Jinping and his colleagues are realizing the futility of propping up stock prices.
Today Chinese officials have already pledged to buy stock to keep prices up. It’s practically a license to steal.
Update
More from Ambrose Evans-Pritchard:
China consumes 50pc of global coal, 43pc of industrial metals and 23pc of grains, according to World Bank data.
Brazil, Russia, South Africa and a string of commodity states face a double-barrelled stress test. The Chinese are freezing imports just as the US Federal Reserve drains worldwide dollar liquidity and prepares to raise rates, calling time on emerging markets that have together borrowed $4.5 trillion in US currency.
The Brazilian real fell to a 12-year low of 3.38 against the dollar on Monday. The South Africa rand hit a record low of 12.69. The Russian rouble flirted with the danger line of 60. It was the same story across much of the emerging market nexus.“One by one the dominoes are starting to fall,†said Societe Generale.
Not just the weather is reminding me of the summer of 2008 these days. (That one, like this one, was very wet.)
From what I have read, a lot of the Chinese stock market plunge was due to margin calls, but how much and how long is not fully known by outsiders.
I do not know how much the commodities futures will be affected, but it is more than likely some of the stock market traders were commodities speculators. As they need to raise cash to cover their margin calls, they will begin to dump futures contracts.
Ditto for bonds, foreign currency, and any and all derivatives they hold.
The Chinese government can simply declare any trades illegal and both parties traitors, and they can hold a trial to find them guilty before they are executed. Anything they own will be confiscated, and they can fix the problem.
They can always dust off Mao’s playbook if necessary. (Assuming they ever put it away.)
I watched an interview with a Chinese gentlemen who described how he started investing his life’s savings in the stock market several years ago, placing it all roughly $170,000 in a single stock for a mine, his investments increased as more countrymen bought stock; he began investing for members of his family; and then his brokers urged him to invest more by borrowing on his investment. Then he started receiving margin calls, and eventually lost everything, and owes something like $170,000. And he kept saying that he couldn’t believe the government would do this to him.
“And he kept saying that he couldn’t believe the government would do this to him.”
A powerful centralized government has the ability to play hardball with it’s citizens. That’s why people should be careful what they ask (vote) for, when supporting as well as singing the praises for more muscular governance, like what is incrementally happening to the U.S. today.
@Jan, my reaction was slightly different. He got hosed by his brokers, who leveraged him over his head, with no diversification, and took his life savings. In America, he would have called a lawyer asking if he had a lawsuit against the brokers.
The Chinese government is introducing market reforms to a populace that appears to lack basic financial knowledge and is still assuming that an all-powerful centralized government is responsible for the market.
I also assume the interview was taped before the announcement that the government was going to buy stock to keep prices up, which I’m sure is a great relief to the brokers that now own that stock.
OT: Mickey Kaus takes an assessment of his position on immigration, and where his position or the issue appears to be going:
http://www.kausfiles.com/2015/07/28/coulters-challenge/
I used to take the chamber of commerce view on immigration, that the main concern was in law-and-order issues; was optimistic on the promise of cultural assimilation, and not concerned about job losses at below-minimum wage levels. The economic downturn moved me towards the Kaussian position on the need for tightening the job market, and more pessimistic on assimilation due to ethnic clustering.
That’s right, PD. For many Chinese, if it happened, then the government made it happen.
Tangentially, notice the dollar has declined in a broad sell-off as traders think the problems in China will delay the first interest rate hike by the Fed. In todays world other countries’ problems don’t stay that way for long.
Wasn’t it just a couple of months ago rising commodity prices meant inflation was around the corner, again?
Steve