China stocks surged in the last 30 minutes of trading today. Anyone care to guess who the buyer was? The Chinese government has justified its massive spending of tens of billions of dollars to prop up the collapsing market by citing the specter of “systemic risk” — the phrase use to justify extraordinary government actions during the financial crisis of 2007-2008. But as Fortune’s Scott Cendrowski pointed out yesterday, there’s little reason for China to fear systemic financial failure resulting from the crash. That’s because stock financing remains a relatively small portion of Chinese companies’ balance sheets. And China’s 90 million stock traders remain a relatively small portion of the overall population, making the effect on household balance sheets limited as well.
So why the dramatic language? It has more to do with political risk than financial. As mentioned here previously, Xi Jinping mistakenly took the soaring market as confirmation of the correctness his policies, and now has to deal with a public that is reading a slumping market as the opposite.
The market’s drop will contribute to the overall slowdown in Chinese economic growth. Driven by a soaring market, the financial sector was an outsized contributor to China’s economic growth in the second quarter. That won’t be repeated in the third. So unless someone fiddles with the numbers, the official growth rate will likely drop well below the government’s 7% target. And many analysts believe the real growth rate is actually a couple of percentage points below that.
China’s problems, however, aren’t likely to prevent the Federal Reserve from finally beginning to raise interest rates in September. Expect to hear more today at 2 p.m. today.
• Summer M&A at record pace
July isn’t quite yet over and dealmaking is already on track for the busiest third quarter on record, with volumes set to surpass $1 trillion. $184 billion in deals were announced in the past week alone, including the biggest deal of the quarter so far: Anthem’s $48.4 billion purchase of Cigna. “This is the most competitive market for mergers and acquisitions we have seen for some time, and that means many executives and advisers who might otherwise have been enjoying some well-earned downtime are spending the summer at the deal table,” a transaction advisory executive noted. Bloomberg
• All eyes on Fed today
The Federal Reserve is expected to point to a growing U.S. economy and a stronger job market as it sets the stage for a potential interest rate hike in September. The U.S. central bank will issue its latest policy statement at 2 p.m. Eastern, spelling out how policymakers feel the economy has progressed since they last met in June. Fortune also explained why we are just six weeks away from higher interest rates. Reuters
• What Buffett’s indicator says about China
Famed investor Warren Buffett has long been bullish on China but the question today is this: given the nation’s recent stock market meltdown, would he still be now? Fortune takes a look at his favorite metric to determine whether a stock market is overvalued or undervalued: the total value of the stock market compared to the output of the economy. To sum it up: China’s market value is high right now, but not perhaps too high. Fortune
• Twitter is in turnaround mode
“Simply said, the product remains too difficult to use. This is both a product issue and a marketing issue.” Those are bold words from Twitter’s CFO after the company reported it added just two million monthly active users last quarter. Twitter’s slow growth has been problematic for a while now, raising questions about future growth trends. And turnarounds are notoriously tough in the Web world. Attempts to revive Myspace and Friendster flailed, while Yahoo and AOL have also struggled to excite new users. Fortune
Around the Water Cooler
• Amazon wants a “drone zone”
Amazon, in a bid to make low altitude airspace safe for package delivery, has floated the idea of a “drone zone” – a way to set rules to govern how airspace below 500 feet can be used by drones. The e-commerce giant is calling for the drone industry to adopt standards for airspace access and for the federal government to adopt performance-based equipage standards. USA Today
• Yelp board loses PayPal co-founder
Max Levchin is resigning as chairman of Yelp’s board to focus on his new startup Affirm, a company that is angling to rethink the way consumers borrow money. Levchin helped found and provide initial seed money to Yelp when it was an early stage startup in 2004. He has served as chairman since that time. The move comes on the same day Yelp outlined disappointing guidance, news that sent shares down almost 19% after hours. Fortune
• Focus on profit jolts GM, Ford
There was a time when U.S. auto makers would chase sales crowns, pumping out higher volumes even if it meant recording slim margins. But General Motors and Ford have instead focused on selling automobiles that customers want: heavier vehicles rather than lower-margin sedans. GM and Ford earned a collective $9 billion in North America in the latest quarter, or more than $3,000 a car sold, leading to second-quarter operating margins in the region in excess of 10%. WSJ says margins are at levels more typical of Germany luxury car makers. WSJ (subscription required)