This has been a strange week in the markets – from fireworks in Greece to technical disruptions at the New York Stock Exchange. But while there are plenty of interesting headlines to catch our attention, the global development that is arguably the most important and far-reaching is the collapse in China’s equity markets, which by mid-week had dropped 30% before recovering toward the end of the week.

The numbers really put China’s collapse in perspective. Greece’s GDP last year was about $238 billion and its debts equate to about $350 billion. However Chinese stocks have lost about $3 trillion since their highs in mid-June. To be fair, those mid-June numbers represent the apex of a seven-year bull run, and many believe that a correction was due. The concern among traders is the size of that correction, and the Chinese government’s aggressive intervention.

To say that government officials are actively trying to avert a meltdown is an understatement. Phase I of the reaction a couple of weeks ago was to lower lending and deposit rates to try to restart some economic activity and restore confidence – the equivalent of the government saying, “OK, let’s juice the economy a little and solve the problem.” As Chinese stocks continued to drop, its government started to loosen restrictions to allow for more stock purchases by some entities in a move that seemed to say, “Wow! This really doesn’t look good.  We need to put a floor in this.”  Phase III involved China halting trading on more than half of all stocks, locking up the selling of certain stocks for six months, and creating central bank money to buy stocks – which seemed to equate to an “Oh no. We have to pull out all the stops and save the stock market.”

Late in the week the hemorrhaging seemed to stop, but left market watchers with a couple of questions:

  1. Was the Chinese government steering the market to this dramatic correction, or did it just run its course? 
  2. Will this sequence of events affect China’s efforts to liberalize its financial markets and establish the renminbi as a reserve currency?

My View: This is a reminder that China’s equities are not immune to the ugly side of markets, and that its government is willing to use a heavy hand in dealing with its stock market, which can be both a blessing and a curse.

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