Yesterday was another short day for Chinese stock traders as trading was halted on the main exchanges less than half an hour after opening with falls in the 7-8% region:
Put the falls into perspective though as the Shanghai Composite launched itself from ca. 2000 points to over 5000 points in less than a year:
Intervention has been the name of the game for Chinese authorities, trying to arrest the natural decline of a bubble they blew up with full intention, enticing newly middle class Chinese into become day traders extraordinaire!
News has come in overnight that authorities are going to abandon the circuit breakers, as they rightly believe it is adding to the volatility and plays into the selloffs.
The broader question is, should they just let it all go? Jake van der Camp at the SCMP asks the very same comparing the massive rise of Chinese stocks compared to their Hong Kong brethren:
The blue line in the first chart shows the growth of the mainland economy on an index basis where January 2000 equals 100. The red line shows you the performance of the Shanghai Composite Index on the same basis.
They could be on two different planets. The economy booms mightily but the stock market just shuffles up and down a little with the occasional speculative rally and then falls back to where it was before.
In the second chart the blue line represent the Hong Kong economy on the same index basis and the red line represents the Hang Seng Index. I have taken this chart back further than in the one for the mainland as Hong Kong has had a meaningful stock market for much longer.
Here we have a market that is clearly grounded in its economy. The two do not move absolutely in tandem but it obvious that investors generally do well when the economy does well.’
And this is where there is a huge difference between the “new” China and for the most part, other developed market economies:
When governments treat investors as cows to be milked or chickens who lay golden eggs and spare no thought for the welfare of these cows or chickens, then what they eventually get is a failure on the farm.
Yes, a stock market is a mighty efficient way of raising needed capital for a growing economy but the customer still has to come first and the customer in this case is the individual investor who puts his money at risk in the stock market.
Reward him and he will reward industry with all the money it needs. In that kind of market, there is never a shortage capital. There is only ever a shortage of good ideas for the use of it. But ignore the investor and sooner or later he will exact retribution.
And things will only get worse with such daft remedies as telling people they may only buy stock and may not sell it or with so-called circuit breakers that stop trading.
The only workable remedy, and the authorities in Beijing will never take it, is to open the market wide, 24 hours a day with no trading restrictions, and let it fall where it may.
Yes, it will hurt but that pain is coming anyway. Why prolong the agony?
Indeed. But due to the interconnectedness of markets, just letting it go could have dire consequences for European and American stocks and be the trigger for the coming of the Mining GFC.
This has been a grand experiment, a microcosm of the way the Middle Kingdom has embraced the better bits of capitalism, but can the Chinese authorities get away with repeating the mistakes made by the Fed during the last GFC, etting Bear Stearns go to the wall and unleashing hell? Or can they push, nudge and cajole the market back down and only slowly extend the pain while providing monetary support and precedent for another bubble a few years down the track.
Stock markets more and more resemble casinos in the West and in the East!