For those willing to pay attention, there’s more to the world of finance than the ongoing Greek tragedy. While Europe delays Greece’s inevitable default, China’s stock market is in the midst of a serious meltdown. Investors in the US might ask, why does this matter to me and my money?
Chinese budding focus on consumerism is a key supporting factor in US investors’ portfolios. In many ways, the pervasive assumption of the continuation of the Chinese economic miracle parallels our own real estate bubble.
As long as real estate was rising, everything was fine. As long as the Chinese consumer is alive and well – following the thought forward to its logical conclusion – the global economy will be fine too. And, remember when the subprime mortgage meltdown was small and contained? It sounds quite similar to the current commentary on the sudden decline in China’s stock market.
Finally, like our real estate market before reality struck, China’s astounding economic growth also stretches back many decades. And, importantly, it is now slowing. What once was greater than 10% growth in China, is now likely down to 5%, if that.
Adding to the sense of mystery surrounding China’s official economic statistics is their ability to magically meet their own projected growth of “about” 7%. For example, on July 14, they announced exactly 7% growth for the just-ended June 30 quarter. Amazingly, they are able to compile and calculate their data much more quickly than the US.
The official statistics coming out of China are probably fake.
However, what’s not fake is the 30% decline in their stock market in less than a month. What’s not fake is the huge decline in global commodity prices. What’s not fake are the reports of a sudden drop-off in car sales across China. And, finally, what’s certainly not fake are the hard-to-imagine-here government actions taken to stop their stock market rout.
The Chinese government has not only cut interest rates, but also relaxed margin trading rules, suspended all trading – no buying and no selling – in 50% of all stocks in the market, banned all new IPOs, restricted short-selling, threatened short-sellers, pressured insiders and executives to not sell any shares, provided loans to companies to buy back their own shares, allowed insurance companies and pension plans to buy stocks for the first time and they’ve also arranged for all brokerage firms to buy, buy, buy!
So far, their efforts have worked to halt the market decline – for now. What comes following the re-opening of normal market forces? My hunch is, not Chinese consumer and investor confidence. Why does that matter? Remember, there’s no doubt we’re all in the midst of a global confidence game.
July 16, 2015 | Jason P. Tank, CFA
