The headlines of the hour pertain to what journalists are calling The Great Fall of China. Following the devaluation of the China’s currency, evidence of a slowdown and the flight of capital, global stock markets fell in what is now being called ‘Black Monday‘.
The US Dow Jones index crashed more than 1000 points within minutes of opening before stabilising to trade around five per cent lower on Monday. It’s an unprecedented move for the Dow which has never lost more than 800 points in a single day.
Stockmarkets in the UK, Germany, France, Italy and Spain also plummeted after China’s Shanghai Composite Index lost 8.5 per cent on Monday – the largest margin in eight years.
The UK’s FTSE 100 index lost more than $85 billion in the first three hours of trading while markets in Japan, Hong Kong, Korea and Australia all closed more than more than 4 per cent down.
The massive sell off, dubbed the “Great Fall of China” is being stoked by fears China has lost control of the situation and doesn’t have the means to fix it.
The global sell-off made a mockery of Jack Lew’s assurance, made at a talk in the Brookings Institute, that China’s markets weren’t linked to the rest of the world.
Jack Lew, speaking at the Brookings Institution in July, confidently assured that Americans were immune from weakening markets in China.
“I will say that China’s markets still are pretty much separated from world markets,” the secretary of Treasury, said. “They’re, obviously, moving towards being more integrated, but right now they’re not.”
Chico Harlan, writing in the Washington Post, says Lew was actually right. Beijing’s stock exchanges are not linked to the world. The problem is that they’re not linked to reality either. However China’s economy is linked to the global engine. What actually happened is that China’s stock market began as a Potemkin project to assure the world of Beijing’s strength. Chinese investors knew the government would be propping up a mere facade; that the worse China’s economy got, the more the Communist Party would paint the facade. Harlan writes:
Let’s take a moment to state clearly that the stock market and the “real economy,” particularly in China, don’t always dance together. Until 2013, China’s major indexes were among the poorest-performing — which made almost as little sense as what happened next.
Starting about a year ago (yes, amid the slowdown), equities boomed. The Shanghai Composite Index more than doubled, and much of China was in a stock-buying frenzy, most of them mom-and-pop investors rather than major money managers. Shares looked like one of the few good investments in the country, particularly with the real estate market cooling. In a sign of how weird it got, there was even an explosion in margin lending — where individuals borrowed money against the value of their portfolios. Chinese bought stocks with virtually no mind of how the companies were actually performing. On the Shenzhen stock market, the average company had a price-to-earnings ratio of nearly 70:1; in other words, companies were valued way way way beyond their (scant) earnings. (On the Dow, by comparison, that ratio is about 16:1).
What drove this frenzy, in part, was the assumption that a slumping economy would actually help stock prices — by prompting the government to unleash a massive stimulus.
“Whenever bad news came out from the Chinese economy, very frequently the Chinese stock market would rally,” said Patrick Chovanec, a chief strategist at Silvercrest Asset Management. “There was this perverse expectation — fiscal stimulus, lending stimulus. You know, good news equals bad news.
“People were telling themselves stories, just like in the dotcom bubble. ‘The government will put more money into the economy, especially as it is going down.’”
The China markets were to use the American term, “too big to fail” — and when they collapsed the fall was a proxy indicator not of itself but of the underlying competence of China’s management. The crisis shattered the illusion of the status quo, which was inconvenient for everybody. Fergus Ryan, writing in the Guardian, quotes sources that regret that capitalism isn’t being more cooperative with government. “China’s leaders look powerless against destructive market forces. The longstanding perception created by Communist rulers that they are always ultimately in charge takes a battering from feral capitalism,” his article leads. It’s a phrase we often hear: feral capitalism. What happens when it meets Feral Communism? The score so far: markets 1: politburo 0.