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China’s ‘Black Monday’ Becomes Everyone’s Stock Market Headache

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One of the big problems with allowing an authoritarian communist/crony-capitalist regime to become a world financial leader is that they lie about everything. China’s long-concealed economic woes finally became impossible to hide, and we got a worldwide market panic that sent the Dow Jones down a record-breaking 1089 points in the early hours, before a rally that was itself partially reversed later in the day.

As bad as things were on Wall Street, the Chinese markets were worse, with even Beijing’s official news agency adopting the “Black Monday” label. A more clever name is suggested by Reuters: “The Great Fall of China.”

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“The Shanghai Composite tumbled by 8.5%, its biggest fall since 2007,” reports the BBC. “That plunge wiped out this year’s gains as investors refused to buy into the Chinese government’s repeated attempts to shore up confidence.”

While the BBC says “the smart money is on the central bank reducing interest rates and injecting a semblance of consumer confidence into the markets,” that hasn’t happened yet, and it seems to have rattled everyone who was expecting it to happen. A plan to allow the Chinese state pension fund to invest in stocks “failed to calm traders’ fears, both in China and abroad,” while currency devaluation has European investors worried about their exports becoming less appealing to Chinese consumers.

“The market was in freefall from the open, crashing through the 3500 point barrier – which the central government had previously said would be the market’s “bottom line” of support – without resistance, and erased all year-to-date gains,” writes the Sydney Morning Herald. “Nearly 2000 stocks – about two-thirds of the market – hit the daily maximum 10 per cent fall allowed by the Chinese stock exchange.”

CNN Money’s analysis pictures the current Chinese stock market woes as, in part, fallout from stern actions the government took to deal with a small-investor bubble popping in June. More troubling in the long term are “signs of weakness spreading through China’s manufacturing sector,” and the feedback loop that could result from international investors bracing themselves for a major Chinese economic slowdown.

Writing at the UK GuardianLarry Elliott proposes that the world’s financial markets are essentially stimulus “junkies” who needed a fresh market-manipulating, currency-printing fix from China, and panicked when they didn’t get it.

“Financial markets in the west have been booming for the past six years at a time when the real economy has been struggling. Recovery from the last recession has been patchy and weak by historical standards, but that has not prevented a bull market in equities,” writes Elliott. “The reason for this is simple: the markets have been pumped full of stimulants in the form of quantitative easing, the money creation programs adopted by central banks as a response to the last crisis.”

The cold-turkey stimulus-deprived markets needed just the sort of bad news China delivered to trigger a selloff panic, but Elliott thinks the problems run deeper than today’s roller-coaster ride in New York and mega-bummer in Shanghai, as investors “have started to scrutinize the Chinese economy in a far more forensic fashion, and do not especially like what they see.” Policymakers in Beijing are afraid to make the wrong moves and look even worse than they already do, accounting for the sense of sluggishness in Chinese government that many foreign media sources have commented on.

In the West, all of the emergency measures have already been deployed to sustain the political illusion of a recovery that never really happened. “Unlike in 2008, interest rates are already zero. Budget deficits mean governments have less scope to cut taxes or raise spending,” Elliott argues. “China’s total debt is four times what it was seven years ago. Central banks have pulled all the conventional policy levers and a few unconventional ones as well. They could shelve plans for interest rate rises and contemplate further rounds of QE, even though that amounts to doubling the dosage for drugs that become less effective every time they are administered.”

The Wall Street Journal is not cheered by the thought of China’s central planners trying to juggle currency devaluation with increased bank liquidity, which – to extend Elliott’s metaphor – sounds an awful lot like using one dangerous, addictive drug to counteract the effects of another.

“Beijing’s struggles this summer have spooked many investors into viewing China as a threat to, rather than a rescuer of, global growth,” the WSJ writes. “During the financial crisis of 2008 and early 2009, China, with a colossal stimulus plan, acted as a shock absorber. Lately, it is China that is providing the shocks.”

The events of the past week make it clear to the Journal that a “growth-starved world” has become too dependent on Chinese money and growth… but only now are they realizing how much of a “black box” the centrally-planned economy is: “For starters, analysts have long wondered about the accuracy of government economic statistics. And levers pulled by Chinese policy makers can be unconventional. This is seen in Beijing’s desire to micromanage the yuan’s value, which undercuts its ability to pursue an independent monetary policy because of spillover effects on domestic liquidity.”

In a way, China is merely providing a massive example of the problems associated with all government-run enterprises. U.S. government agencies are notoriously… creative about reporting on the status of their public-private partnerships, too. Reliable, timely information is difficult to come by. Regulators who would normally punish a lack of candor from private-sector management have no intention of punishing themselves. Referees who take the field and become players in the economic game are not eager to blow the whistle on their own dubious plays. Activist government ends up putting more effort into managing perceptions and controlling media coverage than a healthy economy puts into hiring people and making stuff.

The Wall Street Journal echoes the warning that some of the Big Government tools China uses to juice its economy are losing their effectiveness due to overuse, as we have seen happen in the U.S. and Europe. Tech bubbles are bursting, while new technology economies are proving less capable than hoped of replacing old-economy industries. Politicians of every stripe devoutly believe that perception trumps reality, but they always lose that game to economists in the long run, no matter their ideology.


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