Another Day of Improvisations in China’s Markets

January 8, 2016, 9:15 AM UTC
Shanghai Stock Exchange
SHANGHAI, CHINA - JULY 08: An investor looks at stock index quotes inside a brokerage firm on July 8, 2015 in Shanghai, China. On Wednesday Chinese shares fell again, with Shanghai Composite Index tumbling 5.5 percent to 3,521.20. The Shanghai stock index fall more than 30 percent in less than a month. (Photo by On Man Kevin Lee/Getty Images)
Photograph by On Man Kevin Lee — Getty Images

Chinese regulators scrapped stock circuit breakers today, just four trading days after introducing them.

The key takeaway seems to be that Chinese regulators are improvising, which should not be surprising given China’s short history with stock markets. Ok, you can substitute ‘clueless’ for ‘improvising’ if the fact of it being Friday isn’t enough to make up for the losses on your portfolio this week.

The decision to create stock markets in 1990 wasn’t an attempt to allocate capital efficiency to the most deserving companies—the basic tenants of stock markets elsewhere. The state-owned banks already did that. They were created to quell social unrest.

Following the Tiananmen Square massacre, and political infighting to determine whether China would continue follow capitalist reforms or turn back towards socialism, street markets popped up in Shenzhen. People feverishly exchanged shares of a government-owned Shenzhen bank. Eventually the trading spread to other cities. The Communist Party was acutely attuned to big street crowds following Tiananmen. It sanctioned stock exchanges in Shanghai and Shenzhen in 1990 and 1991 in response to these street markets to control the crowds.

That’s the conclusion of Carl Walter and Fraser Howie in their book Red Capitalism, which outlines how Chinese markets came into being since the country opened doors to the world in 1979.

China’s stock market bears little relation to the general economy, so its frenzied moves this week don’t confirm anything notable about the greater economy, nor should its nearly 2% gain today.

But the improvisation underway in China now isn’t isolated to stocks. China doesn’t look like it knows what it’s trying to do to its currency, the renminbi, or yuan, either, and that is a much bigger problem for the rest of the world.

Yesterday, foreign exchange reserves data from the People’s Bank of China showed holdings fell by more than $512 billion in 2015 to stand at $3.33 trillion dollars at year-end, the lowest level in more than three years. In December alone, they shrunk by $107.9 billion as the PBoC tried to slow the yuan’s depreciation down to a decent rate.

The central bank has been slightly devaluing the yuan to help boost the economy, bank insiders told the Wall Street Journal today. But it comes with a risk: that growing numbers of rich Chinese move capital out of the country to avoid a devaluing currency.

“Until last August, China was just able to balance the contradictory objectives of cutting interest rates, keeping a stable renminbi and liberalizing its capital account,” writes Joyce Poon of Gavekal Economics in Hong Kong today. “The People’s Bank of China managed this breach of the “impossible trinity” through carefully calibrated interventions.”

Panicked traders are now pushing down the value of yuan faster than the central bank can pump it up.

This week’s panic in China’s markets is set against of a backdrop of relatively positive news for the greater economy. Retail sales are expected to grow for December when figures are released later this month (in November they rose 11.2%) and industrial output is also expected to growing at a faster pace.

The official yuan rate rose today, in line with the stock market (although the offshore rate, which many see as an indicator of where the official rate is heading, didn’t). Any more panic was delayed till at least next week.

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