Markets
that climb to dizzying heights over extended time periods are known as bulls
for a reason: they buck. I titled my book on investing Financial Bull Riding
for that reason. A bull has been breaking things in China’s stock market
recently, falling as much as 30% from an ascent of 150% over the past year.
The
exchanges responded by freezing trading in as many as 50% of issues while the
government forbade corporate executives and directors from selling any stock
for six months, suspended initial public offering and made more loans available
to investors. What does it mean? It certainly doesn’t mean what Bloomberg
wrote about it recently:
In
China, the invisible hand of the market sometimes needs help from the iron fist
of the state. That’s certainly true after a meltdown vaporized $3.5 trillion in
the value of shares traded on the Shanghai and Shenzhen exchanges.
The
state caused the market to rocket 150% in a year by making cheap credit
available to buy stocks in the first place. In addition, investors are rescuing
their money from the collapsing real estate market. China has dozens of new
ghost towns because for decades the state limited where citizens could invest
their savings, leaving them with real estate as the only good option. Prices in
real estate have been falling recently, so when the state opened stock
exchanges much of the real estate money went into them.
At
the same time, the state-controlled media urged individuals to buy into the
market. Not only did the state contribute to the markets meteoric rise, it tied
the reputation of its policies to market success, according to Bloomberg:
“This
is a real testing moment for the leadership,” says Zhao Xijun, deputy dean of
Renmin University’s School of Finance. “The evaporation of fortunes of more
than 80 million individual investors would pose unthinkable social problems for
the country.”
And
while the market is $3.5 trillion lower than its peak, that doesn’t mean the
economy is poorer by that amount. The stock market is a zero sum game. For
every loser of a dollar someone has gained a dollar.
The
recent rise and drop in China’s market is not very different from the US market
in the late 1990s that enjoyed the dot.com bubble in which PE ratios lost their
sanity and then went bust.
A
stock market cannot climb 150% in a year without massive credit expansion by
the state. But as Mises explained in Human Action, the money supply must grow
at exponential rates in order to keep the bubble from collapsing. Chinese
authorities probably didn’t know that, in spite of the popularity of Austrian
economics at many Chinese universities.
Stock
markets provide insight into the expectations of others about the future and
help coordinate business plans, according to the great Austrian economist
Ludwig Lachmann. A collapse like that seen in China lately shows that many business
people are growing skeptical about the future of China’s economy.
China is
primarily a consumer
goods manufacturer in the international structure of capital, so if its economy is slowing it signals that
exports of consumer goods to the US and Europe are falling. And if the US and
Europe are buying fewer Chinese goods, that’s probably a sign that consumers in
those markets are hurting. China’s market may be the snowflake that causes the
avalanche in the stock markets of the US and Europe.
http://affluentinvestor.com/2015/07/china-market-collapse-the-snowflake-which-triggers-the-global-avalanche/
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