Will China's Latest Stock Market Crash Pass Too?
The expression, "This too shall pass," was created for China's stock market. Well, not really. It just seems these days to be the case. After all, rumblings going back to April which ignited the first wave of fear and panic never really caught fire. Back then, the head of China's central bank was soothing international financial markets by sounding very much like the rational, even-handed financial Great Helmsman reassuring everyone that the first speed bumps to upset the astounding boom in China's stock market were not going to derail either the Chinese economy or its markets. Here's what we said in response to his reassurance then:
But consistent with "This too shall pass," we may find that, before the week ends, another reversal may take hold reassuring those unflappable investors who continue to hawk China's economy and markets as the future leader of world prosperity. (Of course, maybe they should ask the mom and pop Chinese investors who have been losing their shirts in the latest round of crashing prices about who's leading whom where.)
So, in case you've been in the long-standing camp of China cheerleaders but are now having some doubts, let's see if we can briefly sum up what not only appears to be going on now, but has been going on for a number of years.
After arguably "real" economic progress, China's SOE's - State Owned Enterprises - dominated the economy to the virtual exclusion of real private business. The leaders of the SOEs were no less than the sons (and daughters?) of China's Communist Party leaders, dubbed "Prince-lings" (pun intended) in the media. Taking advantage of the momentum the Chinese economy had built in the years when Chinese companies could compete on the basis of cheap labor, government leaders must have decided that they might as well cash in on the billions pouring into their country - or at least their children should. And so the Prince-lings' government enterprises received virtually free money from the government to establish monopolies over large swaths of the economy. They took that money, goosed the economy with what now appear more and more to be mostly malinvestments (to which we refer above), creating an economic boom as well as a stock market boom, which is now naturally collapsing.
Okay, so it's a simplified explanation. But it's basically what's been going on for years now. And it doesn't even get into the details of how these SOEs make up their financials, without fear of any regulator questioning them; or how the Prince-lings have aggressively - even desperately - skimmed as much money off the top as possible investing said money in real estate in far-off locations like Vancouver, London, and New York; buying up expensive art and other collectibles; generally seeking to transfer their gains anywhere they could possibly escape should, at any point, the obvious becomes public knowledge, so obvious that government officials will be forced by a discontented populace to arrest and try them for exactly what the government originally encouraged. (While such arrests have indeed occurred, they by no means capture the depth and breadth of the corruption.)
We could go on, but we hope you get the picture here. The Chinese economy will continue to pay the price for it's financial sins. The government will do all it can to prevent worse crashes and economic recession (depression?), but such efforts will only last for a limited time until the next crisis phase. That's what's going on and what will continue to occur for the foreseeable future.
The real question now is how big an impact this will have beyond China's border. For that, you may want to remember that all the "experts" have loudly proclaimed there's no spill-over - until now. Now it's getting harder for them to make their claim, as the impact has intensified this week. Oh, they may succeed once more, maybe twice, maybe even thrice. But forever? At some point, may we suggest, it shall no longer pass.
Zhou appears calm, but it masks the turmoil in the Chinese economy. For months now the Chinese stock market has masked the credit crisis too, having doubled over the last year. This past week, however the market plunged. Zhou's quick action on Sunday may indicate a bit of panic as prices dropped another 5% in after-market action late Friday.
It appears the consequences of years of the government goosing the economy with cheap money and free-flowing credit continue to bubble up to the surface. And those consequences can be summed up in one word: malinvestment. That's what occurs in an economy when money is artificially cheap, and in the case of China, even force-fed by the government to government-sponsored industry.Yet soon passed that first whiff of bear, leading to a bounce, leading to, well, what we're now seeing this week as China's stock market fell the most (8.5%) in one day that is has since 2007. This time, world markets reacted a bit more in tune with China than last time, setting off a kind of mini-panic that ultimately subsided by day's end, at least in the U.S. where losses amounted to less than 1%. The thing about it is: it's not over yet.
But consistent with "This too shall pass," we may find that, before the week ends, another reversal may take hold reassuring those unflappable investors who continue to hawk China's economy and markets as the future leader of world prosperity. (Of course, maybe they should ask the mom and pop Chinese investors who have been losing their shirts in the latest round of crashing prices about who's leading whom where.)
So, in case you've been in the long-standing camp of China cheerleaders but are now having some doubts, let's see if we can briefly sum up what not only appears to be going on now, but has been going on for a number of years.
After arguably "real" economic progress, China's SOE's - State Owned Enterprises - dominated the economy to the virtual exclusion of real private business. The leaders of the SOEs were no less than the sons (and daughters?) of China's Communist Party leaders, dubbed "Prince-lings" (pun intended) in the media. Taking advantage of the momentum the Chinese economy had built in the years when Chinese companies could compete on the basis of cheap labor, government leaders must have decided that they might as well cash in on the billions pouring into their country - or at least their children should. And so the Prince-lings' government enterprises received virtually free money from the government to establish monopolies over large swaths of the economy. They took that money, goosed the economy with what now appear more and more to be mostly malinvestments (to which we refer above), creating an economic boom as well as a stock market boom, which is now naturally collapsing.
Okay, so it's a simplified explanation. But it's basically what's been going on for years now. And it doesn't even get into the details of how these SOEs make up their financials, without fear of any regulator questioning them; or how the Prince-lings have aggressively - even desperately - skimmed as much money off the top as possible investing said money in real estate in far-off locations like Vancouver, London, and New York; buying up expensive art and other collectibles; generally seeking to transfer their gains anywhere they could possibly escape should, at any point, the obvious becomes public knowledge, so obvious that government officials will be forced by a discontented populace to arrest and try them for exactly what the government originally encouraged. (While such arrests have indeed occurred, they by no means capture the depth and breadth of the corruption.)
We could go on, but we hope you get the picture here. The Chinese economy will continue to pay the price for it's financial sins. The government will do all it can to prevent worse crashes and economic recession (depression?), but such efforts will only last for a limited time until the next crisis phase. That's what's going on and what will continue to occur for the foreseeable future.
The real question now is how big an impact this will have beyond China's border. For that, you may want to remember that all the "experts" have loudly proclaimed there's no spill-over - until now. Now it's getting harder for them to make their claim, as the impact has intensified this week. Oh, they may succeed once more, maybe twice, maybe even thrice. But forever? At some point, may we suggest, it shall no longer pass.
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