As Greece has receded from the world financial stage, attention has turned to China’s hemorrhaging stock market. Chinese equities are battling a confluence of factors with this crisis, with the top two being the obvious bubble in stock prices and a crushing decline in commodity prices.
North America woke up Monday morning to the news that the Shanghai stock index had fallen by 8.5 percent – the largest one-day decline since 2007. Unlike Greece, however, contagion was obvious and rampant. European and U.S. stocks have posted losses of 1 percent to 2 percent for most of the week. Later in the week, we did see a recovery mitigating some of these losses, but it followed the same pattern as before, with Chinese equities plunging, only to be saved a few days later by government intervention.
In Asia particularly, there were echoes of the 1997 currency crisis as several Asian countries saw their currencies erode throughout the week. China’s currency is, of course, tightly controlled, so investors took their frustrations out on the relatively free-floating currencies of China’s neighbors, which are down 1 percent to 3 percent for the month. Hit hard was the Australian dollar, which is now at lows not seen since 2009.
This rout in the equity market centered in large part on the debate over what the Chinese government can and can’t do with its stock market. Previously, the government intervened in the crisis gradually. But in the latest episode, the government has gone all out to simply buy stocks en masse to stop the bleeding. Many in the financial community feel strongly that this is not a good move.
At the heart of it, China has a tough choice. Investors hate both market uncertainty as well as government manipulation. China has both right now. Going forward they must either let the market experience volatility, or risk being penalized for being overly aggressive.
Our View: China needs to pull back on its heavy-handed tactics. Yes, that is asking a lot within a framework that values stability more than just about anything else. But what is becoming clear is that China’s “price by government decree” mentality is wearing thin and ultimately will not work in the global market, particularly if China wants to continue its development as a financial center.
|The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate. This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader’s specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.|