If you were wondering what the Chinese stock market would look like without government support look no further.
The Shanghai Stock Exchange Composite Index plummeted 8.5% to 3,210 on Monday, erasing all the gains for the year. It was the biggest loss on the benchmark for the A-share mainland market since 2007.
The Shenzhen Stock Exchange Composite Index sank 7.7% to 1,882. The Chinext Price Index, which tracks the fastest growing stocks, plunged 8.1% to 2,153. And the Hang Seng Index, which tracks the H-Shares in Hong Kong, skidded 5.7% to 2,872, a number it hasn’t seen since March 2014.
The rout spread to area markets with Taiwan’s Taiex Index tumbling 4.8%, and the Nikkei 225 shedding 4.6%.
Of course, the contagion spread to the US. The irony is that images of crying Chinese investors have given way to photos of crying American investors in New York. That’s globalization for you, for better or worse.
Do they still want China to fail?
The big reason is the slowing of the world’s second-largest economy. Friday saw the preliminary Caixin/Markit China Manufacturing Purchasing Managers’ Index sinking to a 77-month low of 47.1 points for August. Any reading below 50 signifies contraction in the economy. This follows July’s 6.6% decline in economic growth, according to Bloomberg’s monthly GDP tracker.
Remember the plan to let pension funds invest up to 30% of their funds into the stock market. On Sunday, the State Council, or cabinet, approved the rules. Pension funds closed 2014 with net assets of 3.5 trillion yuan ($547 billion), according to Xinhua News Agency. That would send $163 billion into the market.
But we guess that was pretty much anticipated. The word is that Monday’s rout was sparked by the People’s Bank of China not making a much-expected cut in the required-reserve ratio.
After last week’s the bad economic numbers sent stocks into a near 12% plunge, investors and analysts were expecting the central bank to act over the weekend, reported Reuters.
“Policymakers look lost,” wrote Oliver Barron, analyst at investment bank NSBO in Beijing in a research note, noting that confusion about intentions and approaches extended from stocks into monetary and exchange rate policy. “But the market needs bigger things: growth, reform, easing. Piecemeal support is not enough anymore.”
For months now Asia Unhedged has been calling for more transparency from the PBOC and a loosening of monetary policy. This is merely more of the same incomprehensible inaction.
However, it now appears that Beijing is stepping back from its promise to support the markets. It looks like it’s letting the market fall to give the pensions funds a cheaper entry point.
This doesn’t look very good. On the plus side, and through this all Asia Unhedged remains bullish on China, it looks like the government may be willing to let the market do what it needs to do.
Even with the economic slowdown, China’s growth rate, even if between 6% and 7%, still remains one of the fastest growing economies in the world.
And let’s not forget, China has just created two banks to fund infrastructure projects across Asia. A lot of that will be going into the new Silk Road transportation and trade route from China, across Asia, to Africa. You can be sure a lot of the money will be going to Chinese firms.
By midday in the U.S., markets had stabilized. The S&P 500 Index took a 5% nosedive at the session’s open, but by midday Monday it was down just 1.17% to 1,948. And the Dow Jones Industrial Average was down 1%, or 156 points, to 16,303, after plunging more than 1,000 points at the session’s open.
Maybe US investors are catching their breath and realizing the sky isn’t falling. Asia is where the biggest growth is happening. Asia Unhedged remains bullish on China. Seriously, where else are you going to look? Europe?