Washingtonpost – You can only defy financial gravity for so long. At some point, what went up for no reason must come down for a very good one, no matter what the government does to try to keep it aloft.
Which is to say that it was another disastrous day for Chinese stocks. On the plus side, though, it was a short one. Indeed, China’s market was only open for 14 minutes on Thursday before it fell the maximum 7 percent it’s allowed to in a single session. It’s the second time that’s happened this week, enough to erase almost all its gains since the summer.
Now, on the one hand, it’s kind of silly to ask why China’s stock market bubble is bursting. That’s what a bubble, which is by definition unsustainable, does. They stop. But, on the other, it’s still worth thinking about what it is that’s set off this latest sell-off. And the answer, it turns out, is simple. It’s everything. It’s an economy that seems to be slowing down more than Beijing wants, and rules that perversely seem to have made the panic worse. What does that mean exactly?
Well, here are the three biggest problems.
1. Is China slowing down or is it slowing down? China was never going to keep growing at double-digit rates — there just aren’t as many people to move from the farms to the factories as before — but the question is whether it can do so at, say, 7 percent instead. That’s the government’s official target, and it’s looking like it might miss it.
Now, this isn’t just a matter of China’s economic stats being unreliable enough that economists think “7 percent” growth might be the new 5 percent growth. It’s that the rest of its numbers, particularly manufacturing, show that it’s not in great shape. Well, that and the fact that the government seems to believe this too. It devalued its currency back in August and has continued to do so — its latest move to devalue Wednesday night was its biggest one since that first one — which looks suspiciously like it’s trying to prop up growth by boosting exports.
That’s not the kind of country that people want to invest in. Think about it like this: If Beijing knows more about its economy than anybody else, what does it tell you that it thinks its economy needs more stimulus? It says that China is not only slowing down due to its graying workforce, but also because its slowly deflating credit bubble has it as close as it will get to a recession. That’s admittedly still pretty far away, but there’s a real risk it could have a “hard landing” where it doesn’t grow fast enough to keep unemployment down.
2. Beijing’s plan to calm the market down has backfired. China’s markets are dominated by mom-and-pop traders who are prone to fits of fear, greed and even more fear, sometimes all within the space of an hour. So it’s not unusual for stocks to be up 3 percent one minute, down 2 percent the next, and then finish the day up 4 percent. That’d actually be a pretty tame day by Shanghai’s standard.
The authorities, though, have had enough of this kind of extreme volatility — at least on the way down — and have circuit breakers in place this past week. The way it works is that the market takes a 15-minute break if it’s ever down 5 percent on the day, at which point trading resumes — unless stocks fall an additional 2 percent. Then the market closes for the day. What’s the problem? Well, anytime stocks start getting close to that first level, say down 4 percent, people race to sell anything they might want to out of fear that they won’t be able to if they wait a little longer. That, of course, sends stocks down to the 5 percent threshold, which then gives them 15 minutes to figure out how to sell everything else before the next circuit breaker.
3. The government won’t let big shareholders sell their stock, after all. Beijing tried to stop the last sell-off by saying corporate bigwigs couldn’t unload their shares for six months. That was, well, six months ago. You can probably see where this is going. People were afraid that, once the lockup ended, everybody else would try to sell big blocks of stock all at once, so they tried to sell their own blocks of stock first. The result was what they feared — a crash. So the government did what it always does. It told big shareholders that they still had to hold on to their stock, at least most of it. All they’re allowed to do is sell 1 percent of their shares over the next three months — and that’s provided that they give 15 days advance notice.
Voilà, today’s problem has become tomorrow’s.
A little perspective is important, though. China’s stock market is still small enough that what happens in it doesn’t really matter for its economy. Sure, it might turn into a few bad days for our markets, but just that. The far, far bigger story is whether China’s actual economy keeps growing fast or keeps slowing down. So it’s only insofar as Beijing’s bungled stock market rescue tells us something about their managerial competence, or lack thereof, that it tells us something important.
China’s stock market crash doesn’t really matter for its economy, but its government’s response to it might. That’s because policymakers who have made this many mistakes with their markets might make ones with their economy too — and that’s what matters. Not just for their own standard of living, but for everyone else who has come to depend on China’s economy — and its demand for raw materials of every kind.
It turns out that socialism with Chinese characteristics is just capitalism where markets get punished for giving the “wrong” answer. There’s been a lot of punishment in China and will be for awhile.