China's Black Monday

[Guest realmayo]

Chairman Xi is starting to look rather incompetent when it comes to the economy. Actually, starting to look thoroughly stupid. Encouraging people all year that the government would support the stock markets and telling them to invest. Oops, all of 2015's gains now wiped out. A half-arsed rate cut. Oops, capital flight because there's nothing to suggest further cuts won't follow. And I'd imagine if you're a Chinese leader the one thing you don't want to be telling your subjects is that the economy's going to get whacked and you haven't got a clue what to do about it.

 

When the Western economies hit the doldrums in 2008 everyone praised the Chinese response. But all China did was run up huge debts, continue the housing bubble and then engineer a stock bubble. I dunno, it's always fun to be super bearish and pessimistic but, I don't see how China can keep kicking the can further down the road, one of these days it's got to face up to its problems. However if you've spent the last few years talking about China's century, China's dream, China's overtaking America and China's genius of economic stability thanks to its special political situation, that is much easier said than done. Can you imagine Xi going on telly and saying to the nation: now is the time for some belt-tightening, now is the time for some austerity and some pain? Or who does he blame it on, more corrupt officials? Foreign speculators trying to hamstring China?

 

At least we can now hope that fawning western journalists will stop telling us that 'this time it's different', that China's economy can happily disobey the laws of gravity and so on.

 

P.S. Presumably Bo is sitting in his cell thinking that this was a good few years to be sitting out on the sidelines after all.

[Guest realmayo]

Or as the FT has it (The Chinese model is nearing its end) :

 

China’s economic transition was always going to be difficult, but developments this year suggest that things are not going according to plan. The centralisation of power is proving to be a double-edged sword for reform, the anti-corruption campaign is choking off initiative and growth and the economy cannot be kept on an unrealistic expansionary path by unending stimulus.

 

The time for accepting a permanently lower growth rate is drawing closer. It will test the legitimacy and reform appetite of China’s leaders in ways that will determine the country’s prospects for years to come.

[gato]

Turning People's Daily into a stock promoter was a horrible mistake. So was not cracking on margin lending until it was too late.

The currency issue is debateable. It could be argued that the peg to the U.S. Dollar should have been loosened earlier. The Japanese Yen and the euro have both declined by more than 20% against the RMB in the last year.

The economic problems have long-term causes, the main one being the over-building that happened with the 2009-2012 super stimulus. Xi and Li will be judged on how they react to these problems. There are no easy solutions. The government is trying to engineer a soft landing, with the combination of selective stimulus, new infrastructure projects, loosened housing lending policies, and making it easier to start businesses.

[889]

Trying to control the exchange rate is dumb.

Trying to control the stock market is really dumb.

But China's leaders in recent years seem to have fallen into the same trap as some of their foreign counterparts, using a high exchange rate and a booming stock market as proxies in their support.

If Xi Jinping breaks this cycle, then he's actually doing something dramatic and positive.

[Guest realmayo]

I read two theories for why Xi chose to pump up the stocks. One was to avoid the pain of the property bubble bursting by letting people make money on stocks instead. The other was because government debt levels were getting too high and so in order to stop using public money to lend to companies, he wanted to use citizens' own private money instead, by encouraging them to buy shares in companies. Yes there's a housing problem and yes there's too much government debt but creating a stock bubble does not seem like a clever solution, either the leaders are desperate or they are stupid -- neither being encouraging. So 889, Xi created this bubble, I don't see why he'd get much credit for popping it.

 

Gato, Krugman wrote that you've got to devalue enough that people think your next step, whenever it comes, will be to take rates back up rather than further down. If they expect further depreciation, capital will flee. He reckons capital flight was inevitable after this small, poorly-communicated depreciation, and that it shows the leaders don't know what they're doing.

 

There's a view here (http://blog.mpettis.com/2015/08/do-markets-determine-the-value-of-the-rmb/) that you can only control two of the following three: domestic rates, FX and capital controls. In order to stop too much money leaving, and in order to have flexibility to cut domestic rates to help local businesses, then RMB depreciation wasn't an option, it was a requirement.

[ZhangKaiRong]

No, this is what governments should do.

 

No, you can't control the market - that is clearly dumb. You can be a big Leviathan state, but you still can't beat the basic economic principles. You can give basic incentives in order to maintain the balance, however you can't control the whole process.

 

As for foreign investors, there is clearly less foreigners willing to invest in the Chinese stock exchange. Country risk is high, available information on companies is very limited due to the odd disclosure requirements.

[roddy]

Topic tided up, back to the discussion thanks...

[Silent]

 

 

No, you can't control the market - that is clearly dumb.

 

Define can't control, there is a lot possible. But yes, it's pretty much pointless as it's very unlikely to solve problems and very likely to create new problems. But then, isn't manipulation the idea behind present day fiat currencies?  By manipulating interest rates and money amount a lot of bad things can be disguished or otherwise be manipulated for the benefit of those in control. The problem of this manipulation of markets is that 'solving' one disallocation of assets easily creates a new disallocation of assets. 

[889]

"So 889, Xi created this bubble, I don't see why he'd get much credit for popping it."

He certainly kept the bubble growing until very recently, but he hardly created it. That bubble started almost the moment the stock markets first opened in China.

Note I'm giving him credit if and only if he lets the market find, God forbid, its own level. We are far from there yet.

[Guest realmayo]

Not true: the Shanghai Composite doubled (doubled!!!) between November and June. And he pumped it.

[Guest realmayo]

More on Xi: http://uk.businessinsider.com/xi-jinping-faces-internal-challenge-2015-8

We have reason to believe the unthinkable is happening to China's president

 

But now, under the pressure of an economic slowdown and a stock market in free fall, we are likely seeing the CCP fracture in a way we've never seen before.

It seems some factions within the party are turning away from President Xi Jinping behind closed doors and at high-level retreats.

 

Bring back Bo! 

[889]

If you think Xi Jinping invented the Chinese stock market bubble, then you ought to think again.

In 2014, the Shanghai Composite Index peaked at 5,178.19.

In 2007, it peaked at 6,124.04.

[Guest realmayo]

That bubble burst years ago. Xi made a new one. Check out 2009-2014. No bubble. Check out late 2014 to mid 2015. Bubble!

[somethingfunny]

 

 

Can you imagine Xi going on telly and saying to the nation: now is the time for some belt-tightening, now is the time for some austerity and some pain?

 

I'd love to see this.  "Women of China, you should only marry a man who has enough economic sensibility to have not bought a car or a house!"

 

As far as I understand the yuan has always been undervalued and recently the government has been devaluing it further...  Does this mean its a good time to have lots of RMB if you're planning to exchange eventually?

[StChris]

Ok, so I know my last BBC documentary recommendation didn't turn out so well, but here's one that really is worth watching:

 

http://www.dailymotion.com/video/x1cpoyc_bbc-this-world-2014-how-china-fooled-the-world-720p-hdtv-x264-aac-mvgroup-org_tech

 

It's all about China's economic policy in the wake of the 2008 financial crisis. It's fairly even-handed, includes interviews with lots of important people, and in light of recent events seems rather prescient (it was filmed in 2014).

[StChris]

Here's the Chinese version of that FT article that realmoyo linked to earlier, for those that, in their unwavering dedication to improve their Chinese, eschew such English language sources (ok, I admit, I'm just too tight to buy a subscription to the English language FT  )

 

http://www.ftchinese.com/story/001063641

[Guest realmayo]

(and if you want to read the english and chinese side by side, add /ce to the web address.)

[roddy]

Interest rate cut and relaxation of reserve requirements... global rally... until next time...

[StChris]

Hey Roddy, don't be so cynical! Trust in our leaders and economists, they know what they're doing. They have a far-sighted and foolproof plan for infinite growth on a planet with finite resources, what could possibly go wrong...

[emmanuel]

 

 Hey Roddy, don't be so cynical! Trust in our leaders and economists, they know what they're doing. They have a far-sighted and foolproof plan for infinite growth on a planet with finite resources, what could possibly go wrong...

No, no. Random people in internet know it better!