The Shanghai Composite got demolished today, dropping 8.5% in one day, triggering selloffs in European markets and here too. (US futures are down 4% before the open.) Chinese officials are calling it Black Monday. Government intervention in their market to boost prices has now failed completely.
“I think there is now growing realisation – domestically and offshore – that the Chinese leadership are not in control of the situation. Not only are they not in control of it, they don’t even seem to grasp the problems at times,” said Fraser Howie, the co-author of Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise
“The real casualty over the summer is the government’s credibility. When you look at the stock market intervention, when you look at the FX botch as I would call it a couple of weeks ago, and then you look at the Tianjin blasts, you see a government that is most certainly not in control. You look at this and it sends a very poor picture about China’s competency at the leadership level. Who else is responsible here? Xi Jinping seems invisible.”
When markets crash in such a spectacular way, there is little governments can do. The market forces are simply too ginormous. Still, China has been slow and plodding and its current ideas indicate they don’t really understand what’s happening or know what to do.
As per the WSJ, the PBoC is set to make another move to cut the RRR, possibly as soon as this week in a bid to flood the Chinese banking system with as much as $106bn in liquidity. Meanwhile, a second story doing the rounds is a report that China’s State Council has published a plan allowing for pension funds managed by local governments to invest in the stock markets for the first time. According to Reuters, the report suggests that pension funds will be allowed to invest up to 30% of their net assets in stocks, funds and balanced funds having only previously been able to invest in bank deposits and treasuries.
No pension fund will buy China stock now. The downside risk is clearly way higher than any possibility of a price bounce, which would only be short-term. It will take months for the China markets to stabilize. The worst part is their stock market is almost entirely small investors, cheered on by the government, many of whom were trading on margin and are now suffering catastrophic losses. This will result in anger against and mistrust of the government.