China’s Losing Battle to Save Its Stocks Shakes Up World Markets
China's stock market stimulus involved some dubious measures. It helped for a short while, then everything fell apart again.
HONG KONG — Watch the scrolling LED tickers in China, and you’ll be calmed by the fact that most of the numbers are green. Check the faces of the retail investors around you, and they will only show expressions of dismay and disappointment. This is because, in China, when it comes to showing stock losses and gains, the colors are reversed. Red is up and green is down. And recently it's been down, down, down.
One explanation for this change of spectrum is that the current setup differentiates the “socialist stock market” from the “capitalist stock market.” Others say that it is because red is an auspicious color in Chinese culture, bringing good fortune in any affair that involves money. But right now it’s just a reminder that the market was a gamble all along.
On the last Monday of July, the Shanghai Composite saw its steepest single-day drop in 10 years, plunging 8.5 percent and triggering quiet hysteria in invested households across the nation as the notice came in a calm, cold green. Monday this week brought a repeat; the exchange opened down 5 percent, then continued to drop, falling again by 8.5 percent. Xinhua news agency called it “China's Black Monday." And dark clouds have spread around the world.
By now, Chinese retail investors are used to the ride. Like any other market in the world, opinions reach all extremes. “I don’t want to pour in any more money,” said one. “Trust me, the rebound must come. When will you dive in if not now?” another asked.
Listen to the shills and they will blame the slump (crash is not a word anyone wants to use) on things like the U.S. economy and pork prices in China. Missing in their testimony are the drop in industrial output and the subsequent fall in industrial profits within China.
China’s stock market was riding high in mid-June, but troubles began when the market went into a slide that took it down by 30 percent in early July. Shares lost more than $3 trillion in market value. Over half of the companies listed in Shanghai suspended trading.
Financial firms stepped in, and mutual fund executives injected their own capital into the market. Brokerages made a cumulative $19.3 billion investment in a blue-chip fund to effect stabilization. Firms with IPO designs in Shenzhen and Shanghai postponed those plans and returned capital to investors.
China’s securities regulators also implemented a series of stimulus measures in an attempt to avert the crisis. Pension funds were allowed to invest 30 percent of their net assets in equities. State-owned and state-affiliated firms were directed to buy shares, and had to provide assurances that they would not dump those shares, meaning the government was barring investors from selling the shares they owned. Rules for trading stocks with borrowed money were relaxed. Banks were allowed to loan money to companies using stock as collateral.
For a moment, it looked like the Chinese government’s stimulus measures paired with the actions of financial firms had paid off, wiping away bearish sentiment. There were hopeful signs of a market recovery, and the arrows were red again. The Shanghai Composite was up 16 percent from its lowest point in July. Retail investors were a little less worried.
That didn’t last. The bulls ran with their tails between their legs. The halo around the red Chinese flag in the world of finance lost more than a few lumens.
The Chinese economy is still a juggernaut, but in this year’s first quarter, even the government said that the nation’s economic growth can no longer match the breakout of previous years.
Taking advantage of the reversed colors adopted by the Chinese stock market, traders in China are urging those with a little bit of cash in hand to invest in something else—jade. Don’t buy green stocks, they say. Instead, pick a green rock. Prime jade tends to retain its value over lengthy periods of time, or even climb in value if the piece is carved from good stock mined in Burma.
It has been a rough few months for China. Aside from stock slumps and poor economic performance, labor unrest continues to plague industrial hubs. The nation was rocked by multiple industrial explosions—the most notable being that massive blasts in Tianjin—and sidetracked by North Korea’s renewed beating of war drums.
The rest of the world is already feeling acute pains from China’s economic slowdown. The Hang Sang Index and Nikkei fell. Dow futures were briefly off 700 points and Nasdaq futures fell 5 percent this morning. Emerging markets that depend on trade with China are feeling the hardest hits. In particular, African trade with China has halved compared to two years ago. The Thai baht’s collapse has sent a whirlwind through Southeast Asia.
The Chinese Communist Party’s legitimacy is heavily reliant on its performance—its ability to provide for its domestic population.
China’s weakened stock market hasn’t bankrupted (many) investors, but once it became clear that the government’s stimulus plans were not entirely successful, consumer confidence tanked.
The CCP is planning a massive military parade on September 3 to celebrate what it calls “The 70th anniversary of Chinese People’s Anti-Japanese War and the World Anti-Fascist War Victory Commemoration Day.” So extravagant are plans for the day that it has been declared a new public holiday. The idea behind the military parade is to stir up Chinese nationalism, but folks aren’t buying it. They see the CCP’s stimulus plan and its result as a massive embarrassment, and no number of tanks or goose-stepping soldiers will be able to hide that.