Long time readers will know my view on China policy matters: China’s policy makers are smart and committed. And when they set about doing something they usually achieve their intended result.
It is rarely wise to stand in the way of the China policy freight train.
They have the resolve, the authority, and the resources to get what they want. You might not like the route or the destination. But don’t stand in the way.
Step aside and let the train get to where it is being directed to go. Trying to hold it back is an exercise in futility. And sometimes, the best strategy is to climb aboard that freight train and enjoy the ride.
I have seen this unfold over the years across numerous facets of Chinese policy.
This time it is all about stock markets. And policy support was one of the biggest drivers behind our call on China real estate stocks early last year, and the broader market in August of last year.
We have recently stopped out on those positions with a 63% profit after tightening our stop-losses in mid-June just before the bubble burst [see “This is a Bubble”].
But I must admit that the recent meddling in China’s stock market has tested my long held views on China policy matters.
The flurry of interventions to prop up the country’s flailing stock markets over the past few weeks has smacked of utter desperation.
We know that China’s authorities are control freaks. They do not trust markets, despite much talk to the contrary. There is constant tweaking of the levers, sometimes almost on a daily basis in many areas of economic activity.
But the scale of market interventions in the China stock market has been extraordinary.
Firstly, they appear uncoordinated and almost random in their scope. This is highly unusual from a regime which is noted for concerted, generally well thought out policy initiatives.
Secondly, there have been a number of government bodies sticking their oar in. Usually interventions are masterminded from a central source. This seems less to have been the case here. There are several official bodies that have been issuing policy rules and directives.
Some of the interventions appear contradictory. Apparently tightening liquidity with one hand and loosening it with the other.
Even the police have been directed to delve into the activities of short sellers. Desperate stuff indeed.
Because of course, as with governments everywhere, there is the search for the evil villain in the piece. In this case it is “malicious short sellers” who have been held up as the swindlers, crooks and charlatans.
There has to be a scapegoat, a sacrificial lamb for slaughter. During the height of the 2011 European sovereign crisis the scapegoats were hedge funds who’d bought credit default swaps on peripheral economies (these contracts profit as a country’s creditworthiness deteriorates).
This turmoil will be laid at the feet of “illegal manipulators”, and their supposedly criminal activities. This aims to calm investor nerves by demonstrating that the authorities are doing something about it. This will make them look good in the public eye.
A front page photo in the Hong Kong press last week showed an investor standing in front of a big screen of stock prices brandishing a board saying in Chinese “Government saves the market so that investors will be happy”.
This says a lot about the local reaction to governments meddling.
It looks like all this intervention is having the desired effect, which is to help cushion the fall.
I am not convinced that the turmoil has died down yet. Policy measures here are helping, but they will not drive this market north just yet.
We will bide our time before re-entering the fray.
They say “don’t fight the Fed.” Well, we’re not fighting the PBOC (and all the others)… we’re just stepping aside.
There are a couple of possible medium term impacts of this episode.
First, any broader inclusion of China A-shares into the global benchmark indices in the MSCI stable may be further delayed. Heavy handed government manipulation of markets is not something that goes down well.
Second, these activities may discourage foreign investors from entering the A-share market. It has not been an easy sell to a great many institutional investors anyway. Many will rightly point to recent months as evidence of that.
Third, there is likely to be an acceleration of capital outflows from China. For the past couple of years companies and cashed up individuals have been pouring torrents of money abroad. Real estate markets from San Francisco to Sydney and many points north and south testify to that.
It is not just an investment, but an insurance policy…
Outflows today greatly exceed capital inflows. The current account balance is weakening and China’s massive reserves are now falling, not rising.
Fourth, the combination of these forces will likely force China’s policy geeks to question their commitment to the pace of reform and opening of the capital account. The gates may be kept closed for longer, or at least opened more slowly.
Fifth, this intervention perhaps jeopardises China’s efforts to join the big boy’s money club, the IMF special drawing rights program. Even if China is admitted to the inner circle, I am sure the events of the past month will be examined by the IMF decision makers as part of their deliberations.