China’s Market Rout Is a Double Threat

http://www.nytimes.com/2015/07/06/business/international/chinas-market-rout-is-a-double-threat.html

by chmaynard • 11 years ago

94 78 11 years ago

sharetea• 11 years ago

China is in deep trouble; it has a total debt to GDP ratio of 282%, the highest compared to the other big gdp countries. (http://bloom.bg/1evYSQ5). The housing bubble has already burst in the 3rd and 2nd tier cities in China, and the 1st tier cities are close to bursting. And the shanghai stock market is close to retracing back to 2000, since the current stock market has a p/e ratio that's 41% higher than that of US's 2000 dot com market. (http://bloom.bg/1HNgqA4)

When (not if) the china's stock market collapses, and the capital flight from China accelerates (estimated 600 Billion a year currently http://bit.ly/1NJQuIX), then China is going to be permanent decline for the next 10-20 years. It would be anyone's guess what China will do then, since it will inevitably suffer massive internal unrest, due to the fact that it's ruled by a bunch of dictators.

EDIT: China seems to be following the same path as Japan in 1990, except China has really screwed up their environment and rich people really want to leave the country.

coenhyde• 11 years ago

That is one outcome, assuming China tries to repay their debts. And as you are aware that hasn't worked out very well for Japan. If I was China and shit hits the fan, I would declare bankruptcy. It would hurt everyone but a shock like that probably has less chance of triggering a revolution than 20 years of decline.

adventured3• 11 years ago

In the case of both Japan and China, most of their debt is held internally.

That's why Japan is debasing the Yen, instead of performing a traditional default. They're unable to afford their debt, but if they just outright default, that will hammer their economy in one big hit - the creditors are the Japanese people. The Yen debasement hits them as well, and reduces the real value of the debt, but the premise is it's a gradual process they can adjust to over time (and the politicians get to lie about what's happening, another reason they all universally prefer inflationary schemes).

yishanl4• 11 years ago

I think there's a ton of economic incentive for the rich to leave China and move to the US. In fact, I'd argue it's happening now already, regardless of the performance of the Chinese economy.

Some observations:

- The luxury goods that the rich in China are looking for are much cheaper here in US. The international students I know at school go on insane shopping sprees at the Apple/Sony/Microsoft stores since how "cheap" all the products are compared to the 1.5-2+X markups they have to pay back home. I've seen some classmates fill their suitcases with luxury brand clothing, Apple computers, iPads, Playstations, Xbox, to all bring home and share with their families.

- Assets in the US are much more appealing options in terms of investments, especially real estate/property. There's been a lot of stuff written up in NYT about this. I've seen the same things here in South Bay (Mountain View, Cupertino) where brand new townhouses get snatched up instantly by wealthy families from China that can commit that much $ in such a short amount of time. Being able to pay for your house in cash moves you towards the front of the line.

- Avoiding the whole "corrupted officials with lots of $ in bribes" anecdote (despite it being somewhat true from the crazy stories that I've heard from friends in China), it is much easier to spend the money here without worry of alerting the Chinese government. Especially if you're paying for a lot of your things in cash. Spending money in a lavish manner in China raises a lot of eyebrows.

- Not too knowledgable on this aspect, but apparently there's the loophole where if you bring aging parents in China over to live in America, they can qualify for senior benefits from the US government. They come, despite never having worked in the US, and get monthly checks to cash that are substantial enough to live on. Don't know enough about this to elaborate and I'm a little skeptical about this, but have heard a lot about this.

- America is so much more attractive than China. A lot of the wealthy international students I met in college had very tracked and relatively stress-free lives growing up. They never had to study for or take the gaokao, which is the infamous college entrance exam, since they knew from early on that they would be coming to the US for their college education. A lot of them do try and swing for jobs here after graduation as well, since the pay is substantially higher than in China. Heard this sentiment from a lot of Hong Kong residents.

Curious if anyone has heard/observed similar.

marincounty• 11 years ago

I don't think anyone will respond out of fear of being labeled a -------? I will only comment on buying realestate in the U.S.? I believe realestate should only be bought by U.S. citizens. Right now all a foreigner needs is a individual tax number, and money. We have no real idea how that foreign money was obtained?

Or, who cares?

http://www.zillow.com/intl/en/foreign-buyers-guide/

azinman2• 11 years ago

There are various currency controls that do make it hard to get money out of the country. Clearly it's possible, but if this starts happening in mass just watch as the top leadership makes that essentially impossible.

smil2• 11 years ago

Heard it before, google Orientalism.

WoodenChair• 11 years ago

There's a lot of hyperbole in this post. The graph you link to of debt-to-GDP is actually very similar in China (282), South Korea (286), Australia (274), USA (269), Germany (258), and Canada (247). And for the record, South Korea's is higher than China's according to that graph. China's is more heavily weighted in "non-financial corporate" which is interesting.

And the shanghai stock market is not "close to retracing back to 2000." This graph shows, it's well above that: http://www.tradingeconomics.com/charts/china-stock-market.pn...

You're assuming both a continued free-fall at the same rates and also that p/e ratios in China mean the same thing as they did for .com companies in 2000 in USA. Any market newbie will tell you that what a "normal" p/e ratio is will differ greatly by sector even within the same economy. China's may be out of whack, but it's not fair to make an arbitrary comparison.

I'm no China apologist, but making predictions of 10-20 years of decline with an authoritative tone is wrong given the facts you presented.

seanmcdirmid3• 11 years ago

sharetea, your comment was killed for some reason.

Gibbon1• 11 years ago

I think hysteria would be warranted if the Chinese government were to take a Schumpeter/Hayek/Mellon liquidationist response to the collapse of the market bubble (see the US/Europe circa 1929). Why yes then you would have contagion spreading out into the real economy and a long depression.

I'm thinking not. Instead I the Chinese central bank will inject liquidity again, much to the horror of the WSJ Editorial board who will again sternly warn that such actions, mark their words! come to an bad end!

snort

jblow• 11 years ago

Graph does not appear to be inflation-adjusted.

powerapple• 11 years ago

but yeah, a bunch of dictators

imron• 11 years ago

People have been predicting 'The coming collapse of China' (https://en.wikipedia.org/wiki/The_Coming_Collapse_of_China) for well over a decade now, and the world is still waiting with bated breath.

I mean a stopped clock will still be correct at least twice a day so I'm sure the naysayers will be correct eventually too.

Anyway, I doubt China will suffer massive internal unrest, because those dictators aren't as dictatorial as you might believe and because most of the Chinese population generally support their government, at least in principle, and see instances of abuse and corruption as 'bad apples' spoiling the bunch rather than any sort of problem with the system or government itself.

kanagawa• 11 years ago

In fairness, the tacit Sino-American currency union has propped up Chinese industry since the Nixon Era. Predicting that the U.S. would eventually fatigue of this arrangement wasn't totally insane. Those folks just didn't appreciate that the U.S. and China were going to keep trucking along until China's population was well and truly urbanized. China just cracked the 50% urbanization ratio in the last couple of years, so who knows if the government there will remain motivated to drag peasants into the cities, or not.

nkozyra• 11 years ago

Why do people continue to use aggregate debt (including domestic bond debt and outstanding liabilities) to present GDP ratio as though it is a meaningful harbinger?

Any non-superficial analysis of what that entails and means should show you this is - while not entirely irrelevant - mostly meaningless as an indicator of economic health.

irln• 11 years ago

Non-sarcastic question, what are the indicators that you don't find mostly meaningless when it comes to analyzing China?

repsilat• 11 years ago

mostly meaningless

Well, you have to know at what interest rate the country borrows, and have an idea about the country's deficit and rate of GDP growth to know how sustainable the debt is, I suppose, but it's a pretty important number nevertheless...

kev61683• 11 years ago

many shocking claims in the post, "deep trouble", "has already burst", "collapses", " permanent decline", "inevitably suffer", "massive internal unrest", "has really screwed up", ...

This assertiveness on something so complex is not productive and helpful.

mark_l_watson• 11 years ago

To be honest, I spend much more energy studying the economy of my country (USA) than China.

In the USA, we will probably have a major market corection to current "bubble-ism" soon, and in my opinion a 20 to 25% drop in prices would deflate bubbles and probably make things more stable. A good thing in the long term, I think.

The other good thing about the current problems like we see in China, Greece, etc. is that it will hopefully slow down the trend of the elites making massive amounts of money with financial transactions instead of BUILDING THINGS and other productive activities. When the elites make money by pulling it from the lower classes that is a bad thing; they need to go back to building infrastructure and becoming more decent world citizens who care about the world that their children and grandchildren will be living in.

The problems that China is facing are bad, but they do have high savings rates and an increasingly better educated population in their favor.

It will be really interesting to see how things shake out in the next few years. I am fairly optimistic, but we will see what happens.

seanmcdirmid3• 11 years ago

hopefully slow down the trend of the elites making massive amounts of money with financial transactions instead of BUILDING THINGS and other productive activities

The Chinese already do this, but many of the projects are white elephants, or infrastructure that isn't useful (as opposed to useful infrastructure, which it still needs in many areas). How many steel plants do you need?

What China really needs is to get consumers consuming. People have to save lots of money to buy an overpriced house or to prepare for health emergencies, they can't afford to buy many things beyond that.

Animats• 11 years ago

The chart in that article is grossly deceptive. It shows only the last six months of the Shanghai index. Here are the past ten years.[1] That tells you a lot more. For one thing, that index hasn't come back to its 2008 high. That's more significant than the current correction.

[1] http://finance.yahoo.com/echarts?s=000001.SS+Interactive#{"r...

tomp• 11 years ago

The other interpretation (that I stole from ZeroHedge) is that a collapse of the Shanghai index will again correlate with the collapse of the US markets.

jpatokal• 11 years ago

The Economist predicted this crash in May, and has a series of good articles about it: http://www.economist.com/blogs/freeexchange/2015/05/chinas-s...

China's stockmarket is sufficiently weird to defy most normal analysis though: there are heavy restrictions on who can list and who can invest, plus China in general has lots of money sloshing around looking for a decent place to invest, because the usual mainstays like bank deposits have zero to negative returns. So the bubbles and pops there (and this is far from the first) don't have a lot of correlation to the health of the overall economy.

chetanahuja• 11 years ago

"China in general has lots of money sloshing around looking for a decent place to invest, because the usual mainstays like bank deposits have zero to negative returns"

Umm... this is the situation everywhere right now. This is one of the reasons that big money from hedge funds etc. has started moving to riskier bets in venture capital territory.

intrasight2• 11 years ago

there are heavy restrictions And don't forget the fact that short selling was illegal until earlier this year, and even now only a limited number of stocks are allowed to be shorted.

rsync• 11 years ago

"And don't forget the fact that short selling was illegal until earlier this year, and even now only a limited number of stocks are allowed to be shorted"

... which means the crash will be even faster and more brutal.

Remember, short positions close by buying the shorted security. This means that in a healthy (albeit declining) market there is always buying at every level down as shorts cover.

Limiting short selling is a misguided feel-good move ... a PR stunt that only serves to make the pain worse.

joosters5• 11 years ago

An expensive prediction. Sure, they are now right, but the index grew from 4250 at the time of that article to over 5000 before this latest crash. Anyone shorting the market on their prediction would have most likely been wiped out before they could make a profit.

Calling the top of a market is difficult, and to be fair, the Economist hasn't done too badly here. However, you've got to call the bottom too. Will the Economist be able to say if the current market price is now 'correct' or not? Has the bubble burst or is there more to go?

dpweb2• 11 years ago

Ignored is the fact that market was up 150% in the preceeding 12 months of its top. It's an extremely volatile market and a large selloff would be expected, probably inevitable. It's still up for 2015. Not exactly a crisis.

PuppyWhirl• 11 years ago

As an isolated case I would agree, but I'm still betting that this combined with the eurozone events will be the final straws for reversing investor sentiment to precipitate another large global recession.

The underlying causes of the 08 crash in America were never addressed (consumer debt, real growth), and the Fed's interest rate games and QE only served to force investors into riskier and riskier assets, which only hurt productive real investment. All the valuation and volatility metrics have been screaming louder and louder for a long time now.

olalonde• 11 years ago

Not surprising coming from the NYT. They've been China bashing for a long time and that only intensified after getting blocked back in 2012.

joosters5• 11 years ago

It's lost 30% of its value, was that to be expected? Are you saying it won't fall any further? To me, it seems that you are glossing over a large stock market crash.

Talking about it being 'to be expected' is a nonsense. If the market is so predictable, kindly enlighten us about what happens next, rather than being wise in hindsight.

ams6110• 11 years ago

Just eyeballing the chart in the story, it's still up 10% from January 2015. That's not a bad return. This looks like a correction of a ridiculous overvaluation spike to me.

No market is predictable. That is why you don't try to do it. Invest regularly, i.e. dollar cost averaging. The couple who invested their entire savings in one shot during an obvious run-up made an all to common emotional mistake.

OC I haven't studied the situation there in any depth.

dpweb2• 11 years ago

They call them corrections for a reason. Extreme moves in one direction increase the likelihood of extreme moves in the opposite direction. You can chart volatility just like you can chart the price. Volatility is high right now.

Corrections are not the same as crashes that wipe out 20 or 30 years of gains. The index is still up for the year. It is very disturbing that the govt. rushes in to attack short sellers and prop up the market artifically, funneling money into it. They show no enthusiasm to attempt to curb the bubble as its growing as the mkt is on the way up. In that way they are the same as the western world.

tim333• 11 years ago

You can get problems if the market goes up, people borrow a bunch of money to buy stock and then it goes back down again. The winners aren't much affected, the losers cut their spending / lending and so the economy (as in total spending) dips.

curiousjorge2• 11 years ago

vast majority of Chinese firms trading on the Chinese stock exchange offer no transparency, and with the recent scandals involving phantom companies valued at billions and "anti-corruption" moves is causing sell offs and capital flight.

But this is hardly the concerning part, what is apparent is a loss of market trust in the system from the public and abroad. If China is to become a superpower, it cannot play by it's own rules.

dear3• 11 years ago

"China is to become a superpower, it cannot play by it's own rules."

A superpower by definition is it plays by its own rule.

curiousjorge2• 11 years ago

There is only one superpower at the moment and likely for quite some time. A few can claim it's status but cannot enforce or confront the one superpower directly.

socceroos3• 11 years ago

Yes, and no.

Yes in that a superpower does bend the rules to suit themselves.

No in that a superpower is suddenly held to a higher standard than the rest of the world. You'd need to resort to expansionism if you wanted to continue the way that China is right now.

matchagaucho• 11 years ago

Could the headline here just as easily be "Chinese stock market drops down to March 2015 levels"?

danmaz74• 11 years ago

From what I understood, the biggest problem is that lots unsophisticated investors (families) invested when the prices were already up, as it usually happens with bubbles, and now they are in deep trouble. This in turn could create big troubles in the "real economy".

adventured3• 11 years ago

That was intentional on the part of the Chinese government. They haven't been subtle about it.

Chinese households are the only sector with a healthy balance sheet. Their corporations are carrying epic amounts of debt in relation to GDP. The premise was to transfer wealth from households to corporations, to improve the corporate balance sheets (via share issuance).

cft• 11 years ago

In the future, the big news that will move American markets will increasingly come from China. I wonder what this does to American indexes tomorrow.

sfrechtling• 11 years ago

Hard to tell with the noise out the Eurozone. Together, the next week will be a bit of a bumpy ride.

Definitely agree with your first statement; maybe you should look towards Australia as an example country that over the past 5 years has been increasingly following Chinese financial markets (Commodities and now property).

woodpanel• 11 years ago

Anti-China hyperbole.

Every pseudo-economist-nerve of mine tells me that one day China inevitably will crash and when it happens it will hurt us all.

But please, enough with the nitpicking in search of ideology affirmation.

Why this is not the crash everybody's waiting for? It's a stock market that is about to crash-out it's volume that was gathered just months prior. Not enough time for most of the worlds shareholders to incorporate Chinese prices into their portfolios.

The Chinese stockmarket's prior boom was mainly driven by the HK-SH stock-market link, allowing foreign investors to buy Chinese stock. Combine that with

- the assumption of risk-takers that the world would flock in gazillions to buy Chinese stock

- and the lack of investment options the ordinary Chinese people have to put their savings in

and you got your self a little bubble going.

But that bust (which is not close to eliminate the prior gains yet, btw) is not the bust we're rightly fearing. Not every economic accomplishment of China can be discredited just by the immorality of its leadership.

seanmcdirmid3• 11 years ago

That bust could set off a domino chain reaction, which is why the leadership is so desperately and shamelessly trying to prop it up. There aren't many other signs of optimism for the "new normal", and I'm a bit worried about what will happen next.

coliveira2• 11 years ago

Every crisis starts in the same way: it is called a bubble because everybody thinks that things are going so well, and they will probably continue the same for a long time. I think China investors are in this complacency bubble, and they are probably coming to a rough awakening.

kev61683• 11 years ago

Western media has a tendency to see China through a pair of gloomy glasses, and thus often are so certain that next Tuesday is China's doomsday.

Here are ALL the headlines (contains the word "China" ) from Yahoo News in the last 3 days. 12 out of 13 have negative words in the headline:

-------------------

Xi Jinping has run into the one thing in China he __can’t control__

China's Boom Has World Bank __Worried__

The South China Sea is now a 'core interest' of Beijing — and that's a __problem__ for its neighbors

China’s __aggressive__ posture toward the South China Sea has been __stirring tensions__ in the...

China hunts for "manipulators" as stocks __tumble__

Is ‘China in Africa’ something to __fear__?

China __angered__ by new U.S. military strategy report

China says tourists __attacked__ in Turkey during __anti-China protests__

China Has World’s Fastest Trains, U.S. Lags

China’s __insatiable appetite__ for power

Zeroing in on __empty homes__, China throws developers a lifeline

S. Korean official falls to __death__ in China

China's __Unsettling Stock Market __Collapse__

-------------------

I wanted to record the headlines for a month, produce a fancy chart and demonstrate how extreme and rampant the bias is, but I keep forgetting about doing it. Besides, it's probably well known that most media outlets from any country (including the USA) are shit, so why beat a dead horse? Before you shout "foul", I agree we can debate all day on whether a particular word really has negative connotation. Oh, China's media outlets are shit too, even shittier.

As long as we get information from as many diverse sources as possible, we should be fine. The problem is majority of folks has been fed biased information since childhood, and once a system of beliefs and images is established it's nearly impossible to shake it off.

snowwrestler• 11 years ago

This is only insightful if you do the same thing for other countries as headline subjects and then compare the relative rates of negativity to see if China is an outlier.

News headlines tend toward the negative in general, because it's not newsworthy when things work like everyone expects them to.

kev61683• 11 years ago

my original plan was to pick 5 news outlets from each of the top 20 powerful countries, grab headlines for a consecutive 30 or 60 days, and come up with a negativity value from country N towards country M, so the final result would be a 20X20 matrix. Too much work, so it's not done yet.

But based on my years of experience in consumption of news from major media outlets in the world, the relative rates of negativity towards China is in the vicinity of 12/13, i.e., extremely high and very much an outlier. Of course it's just my guesstimate and gut feeling.

tokenadult• 11 years ago

Here is the latest reporting from Reuters on the opening of the stock markets in China, where it is already Monday 6 July 2015: "Chinese stocks jump after Beijing unleashes emergency support"

http://www.reuters.com/article/2015/07/06/us-china-markets-i...

The article notes, "Oliver Barron, China policy research analyst at NSBO, said it wasn't just faith in the markets at stake.

"'After the market continued to fall despite myriad support measures, the government reached peak panic mode and must have worried that investors would not only lose confidence in the markets, but in the government itself,' he said." This is the new issue in China, that now any weakening in the market is seen as a vote of no confidence in the central government. We'll see how the next week or so of trading goes.

Eridrus• 11 years ago

BREAKING: CHINA'S NATIONAL SOCIAL SECURITY FUND (PENSION FUND) ORDERS ALL ITS ASSET MANAGERS "NOT TO SELL A SINGLE STOCK" - CAIJING MAGAZINE

https://twitter.com/george_chen/status/617903802201411584

China’s Market Rout Is a Double Threat

Related Stories