Yesterday’s big investment story was China going bonkers. You’ll recall from the Capital and Conflict roundtable at the end of last year that China was flagged as the number one worry by the panel. The specific worry was that China’s debt-laden financial system would drag down its economy and unleash a wave of global deflation, including falling stock, bond, and commodity prices.
Well, that turned out to be an accurate worry. China’s opening-day swan dive triggered the worst sell-off in global stocks in four months. The FTSE’s All World Index was down as much as 2.7% at one point. The Dow rallied 191 points off its intra-day lows, but still managed to close down 276 points, or 1.58%.
That’s just a reminder that even though China’s stockmarket problem is China’s stockmarket problem, it’s also a problem for investors everywhere. And if Chinese GDP grows at less than 5% this year – a possibility suggested Byron Wien, the vice chairman of multi-asset managing at Blackstone – it could trigger a bad debt crisis in China and further yuan devaluation.
It was the modest August yuan devaluation that triggered a big correction on global markets. But at sub 5% growth, with an honest to goodness banking and currency crisis, you wouldn’t be looking at a correction anymore. You’d be looking at a bear market.
Chinese authorities know this. It’s why they injected £13.5bn into the financial system yesterday. When liquidity cracks begin to appear, find more cash! The People’s Bank of China made the money available through a seven-day reverse repurchase (“repo”) agreement. It seemed to help.
After a chaotic opening, Chinese stocks suspiciously stabilised by the end of the day. The Shanghai Composite opened up the trading session 3% down. But then buyers – buyers from somewhere, anywhere – stepped in. The index managed to eke out a small loss on the day.
Here’s the question no one really knows the answer to: how rigged are global stockmarkets?
I’m not talking just the copious amounts of credit made available through low interest rates. I’m asking if you can trust stockmarket price action to be a reliable leading indicator of future economic growth. Are investors really in charge? Or is the market now run by computers responding to the words of central bankers?
In the event, China lives to fight another day. But for the rest of this year, it’s now clear that even the best-laid plans of central committees can quickly fall apart. When they do, liquidity evaporates and markets seize up. Add that to the ‘big risk’ column for 2016.
Category: Economics