REUTERS
JOHN PAUL CARDINAL (*) 11/01/2016
There are three reasons behind the stock market earthquake that has shaken the Chinese markets at the start of the year. First of all, It is necessary to refer to the capital outflow controls in force in China., that in combination with the financial repression suffered by the deposits of Chinese savers (who in fact receive zero or negative interest), explains that many of those savers who cannot resign themselves to their money losing value in the bank take refuge in the only other two possible investment alternatives: the brick or the stock market.
This explains that, contrary to what happens in the main world stock markets, Retail investors play a very relevant role in the Chinese stock markets. The figures are always controversial in China and must be taken with caution. But according to the investment firm China International Capital Corporation (CICC) around the 80% of transaction volume is in the hands of small investors, figure that Reuters raises to 85%. In any case, There are tens of millions of individuals - many of them day traders- who operate in the markets in a very emotional way.
In their stock market adventure they are clearly more sensitive to government intervention, to what was disclosed in the state press and to the rumor mill than to the economic fundamentals. So, it is not strange that, as its short history demonstrates, The Chinese stock market is very volatile and prone to wild swings. As soon as euphoria or panic breaks out, causing stampedes like the one last week that forced early closures of the session when falls greater than the 7%. can't, therefore, analyze the behavior of the C in accordance with the parameters and logic that prevail in the main international stock exchanges.
Fraser Howie, coautor de Red Capitalism: The Fragile Foundation of China's Extraordinary Rise, advierte de hecho que en China "todos los inversores, including institutional, They are speculators and short-termists" because in that market it only makes sense to invest in the short term. Develop a long-term investing mindset, this expert points out, would require listed companies to show long-term viability before, something that does not happen in a situation of overcapacity and economic slowdown like the current one. "Los inversores institucionales son cortoplacistas porque las propias compañías también lo son", explica Howie. This is a decisive factor of volatility.
In second place, To such a peculiar stock market culture we must add the tensions unleashed by the Chinese regulator, supporter -at the same time- of letting market forces act and maintaining state control. Many analysts link the actions of the regulator - first putting in place and later eliminating the automatic suspension mechanism- with the nervousness and sales fever of the last few days. Howie believes these tensions are also behind the debacle.: "¿cómo conjugar 'control' con 'mercados'? Answer: it can't be done. There are no reforms in sight. What we see is greater control in many areas. No veo un derrumbe pero sí una espiral descendente y muchas más semanas como la anterior", finish.
Third, The pessimism in the stock markets is also a consequence of the loss of steam in the Chinese economy and the unflattering expectations that hang over it.. Despite the fact that the Asian country has been the one that has best endured the worst years of the crisis among the large economies on the planet, contributing decisively to global growth, the years in which its economy grew above the 10% han definitely touched his end. After three decades with a growth rate higher than 9% on average, The forecast this year is that it will do so only at 6,3%. She further , its economy faces major challenges: inter alia, a heavy debt, huge overcapacity and, above all, the always difficult ones -and resisted- structural reforms that are required to transition from an economic model based on production and public investment to another based on consumption.
Although it is estimated that only one 2% of investors in the Chinese stock market are foreigners, After the turbulent week in China, four trillion dollars evaporated from global stock exchanges, confirming that panic is -without a doubt- contagious. Investors' fear is that China, that influences practically all areas of the world economy, ends up suffering a strong slowdown that penalizes the global recovery. Countries that export massively to China, like germany, they would be immediately beaten. But above all the emerging ones would suffer, which in the last five years have clung to China's demand like a burning nail to sell raw materials and resist the crisis.
The devaluation of 6% suffered by the yuan since August last year, when a stock market crash like the current one occurred, not only aims to provide greater competitiveness to Chinese production, sino que 'traslada' emerging countries part of their crisis by forcing them to devalue their currencies to be competitive. New devaluations of the yuan could lead, possibly, in a much more worrying currency war. In any case, Lower Chinese demand is already one of the main causes behind the collapse in raw material prices, starting with oil. With these prices at minimums, Many Chinese energy investments planned abroad are on stand-by due to lack of profitability.
(*) Juan Pablo Cardenal is co-author of the book The Unstoppable Conquest of China
