Greece ‘A Sideshow To China Meltdown,' Ex-BMO Chief Economist Says

[jmotivator]

Greece

As the Greek debt drama plays itself out one 60-euro withdrawal at a time, some economic observers are saying the world is paying attention to the wrong crisis.

That's because in the space of three weeks, China’s Shanghai Composite stock index has lost nearly 30 per cent of its value, wiping out some $2.3 trillion U.S. in wealth. As Bloomberg News put it, that’s a loss of $1 billion for every minute of trading. Regulators have halted trading in more than 700 listed companies, and at least two dozen IPOs have been cancelled.

And some economists fear the country’s response to the downturn could be worse than the stock market crash itself.


There is a reason we haven't been hearing about the wonders of China's command economy for a while. It's in free fall. The Chinese government reactions to this are a good indicator why their problems will likely get much worse. They are focusing on all the worng things, taking actions that seem more driven by pride than fiscal pragmatism.

 

[Peter Grimm]

Isn't their stock market still up like 85% from January or something like that? "Free fall" is a bit overstated, I think. This is more of a retracement.

 

[Peter Grimm]

Greece

As the Greek debt drama plays itself out one 60-euro withdrawal at a time, some economic observers are saying the world is paying attention to the wrong crisis.

That's because in the space of three weeks, China’s Shanghai Composite stock index has lost nearly 30 per cent of its value, wiping out some $2.3 trillion U.S. in wealth. As Bloomberg News put it, that’s a loss of $1 billion for every minute of trading. Regulators have halted trading in more than 700 listed companies, and at least two dozen IPOs have been cancelled.

And some economists fear the country’s response to the downturn could be worse than the stock market crash itself.


There is a reason we haven't been hearing about the wonders of China's command economy for a while. It's in free fall. The Chinese government reactions to this are a good indicator why their problems will likely get much worse. They are focusing on all the worng things, taking actions that seem more driven by pride than fiscal pragmatism.

By the way, kudos for bringing up a news topic that's actually impactful and relevant, even if the fact that discussing it might require your readership to actually posess brains.

I was sick of reading threads about the confederate flag, Sara Palin's daughter, and a tv commercial in new zealand. Kudos.

 

[SenorXm/Sirius]

My God another doom and gloom prediction. I've been waiting for China and especially their real estate market to collapse for 15 years.

 

[jmotivator]

Isn't their stock market still up like 85% from January or something like that? "Free fall" is a bit overstated, I think. This is more of a retracement.

No, it is only up about 100 points over its highest January close. It lost 32% over the last month and the crash isn't over. This last close saw a 6% drop.

Likewise the real estate market in China is crashing as well. Poly Real Estate Group, who mysteriously gained in trading in May even while the real estate market was in rapid decline has lost 30% of its value in the last month.

I don't see any reason for the crash to stop at this point. Real estate seems primed to turn upside down before the end of the year as they have YEARS of overstock development. Without the underlying real estate inflation the Chinese economy loses one of its primary economic engines.

 

[Andalublue]

There is a reason we haven't been hearing about the wonders of China's command economy for a while. It's in free fall. The Chinese government reactions to this are a good indicator why their problems will likely get much worse. They are focusing on all the worng things, taking actions that seem more driven by pride than fiscal pragmatism.

That's funny! You might like to look up the definition of 'command economy', where the means of production are publicly owned. China hasn't been a command economy for decades. The worst hit sectors of the market are privately-owned companies whose share prices have depended on small, private, retail investors.

I agree that not much attention has been paid to this matter, and the stock market crash looks catastrophic and will continue to do so if it continues, but don't forget that it comes off the back of a sky-rocketing of share prices that has inflated the stock market 150% in the past 12 months. A subsequent 30% fall at the moment looks more like adjustment.

Here's a good analysis of what's going on.

China's stockmarket crash: A red flag | The Economist

 

[jmotivator]

My God another doom and gloom prediction. I've been waiting for China and especially their real estate market to collapse for 15 years.

Real estate prices are in collapse and have years of over stock, the markets have lost 30% of their value and show no sign of slowing. I'm not sure what you see as positive in the Chinese economy at this point.

 

[Ockham]

China has been manipulating their stock market since it was started - I'm not sure why they are letting it fall because it's not a free market at all. The central government can certainly stop the free fall immediately so the question is, why aren't they?

 

[Simon W. Moon]

China has been manipulating their stock market since it was started - I'm not sure why they are letting it fall because it's not a free market at all. The central government can certainly stop the free fall immediately so the question is, why aren't they?

Some folks think it's not for lack of trying

from the article upthread
China's stockmarket crash: A red flag | The Economist

Yet China’s intervention has screamed of panic. Had the central bank stopped at cutting interest rates—justifiable support for the economy when inflation is so low—that would have been reasonable. Instead, there has been a spectacle of ever-more drastic actions to save the market. Regulators capped short selling. Pension funds pledged to buy more stocks. The government suspended initial public offerings, limiting the supply of shares to drive up the prices of those already listed. Brokers created a fund to buy shares, backed by central-bank cash. All the while, state media played cheerleader. Far from saving the market from drowning, the succession of life buoys only pushed it further under water. The CSI 300, an index of China’s biggest-listed companies, fell almost 10% over seven trading days after the rate cut. ChiNext, an index of high-growth companies that is often described as China's Nasdaq, fell by 25%.​

​

Theories have flourished about why the government has waded in so heavily.​

 

[jmotivator]

That's funny! You might like to look up the definition of 'command economy', where the means of production are publicly owned. China hasn't been a command economy for decades. The worst hit sectors of the market are privately-owned companies whose share prices have depended on small, private, retail investors.

I agree that not much attention has been paid to this matter, and the stock market crash looks catastrophic and will continue to do so if it continues, but don't forget that it comes off the back of a sky-rocketing of share prices that has inflated the stock market 150% in the past 12 months. A subsequent 30% fall at the moment looks more like adjustment.

Here's a good analysis of what's going on.

China's stockmarket crash: A red flag | The Economist

First, you haven't defined Command Economy correctly. A command economy doesn't require state ownership, only that state dictates production and prices. China quite obviously does that.

Second, you are calling a 30% fall an "adjustment" when the fall isn't even over.

 

[jmotivator]

China has been manipulating their stock market since it was started - I'm not sure why they are letting it fall because it's not a free market at all. The central government can certainly stop the free fall immediately so the question is, why aren't they?

At some point you run out of other people's money.

 

[Andalublue]

China has been manipulating their stock market since it was started - I'm not sure why they are letting it fall because it's not a free market at all. The central government can certainly stop the free fall immediately so the question is, why aren't they?

The worrying thing about all this isn't about government manipulation, all governments do that, but that the similarities between now and 2007 are fairly stark:

From October 2007 to October 2008, the Shanghai Composite Index absolutely crashed. In the end, more than two-thirds of all wealth in the market was completely wiped out. You can see all of this on a chart that you can find right here. What makes this so important to U.S. investors is the fact that Chinese stocks started crashing well before U.S. stocks started crashing during the last financial crisis, and now it is happening again. Is this yet another sign that a U.S. stock market crash is imminent? (Emphasis mine)/QUOTE]

Guess What Happened The Last Time The Chinese Stock Market Crashed Like This? | SilverDoctors.com

 

[Peter Grimm]

No, it is only up about 100 points over its highest January close. It lost 32% over the last month and the crash isn't over. This last close saw a 6% drop.

Likewise the real estate market in China is crashing as well. Poly Real Estate Group, who mysteriously gained in trading in May even while the real estate market was in rapid decline has lost 30% of its value in the last month.

I don't see any reason for the crash to stop at this point. Real estate seems primed to turn upside down before the end of the year as they have YEARS of overstock development. Without the underlying real estate inflation the Chinese economy loses one of its primary economic engines.

I just checked the data, first of all... no doubt the Chinese stock market is getting absolutely slaughtered right now. They are, still, up like 100% from two years ago, though.... not that I'm in any way bullish on Chinese stocks at the moment, just pointing out that the current crash might have more to do with the inherent volitility of that particular stock market, and less to do with any suddenly diminishing values of the underlying assets.

China's thing is they love margin. Their stock market has always been a giant casino. You're watching a way over-leveraged bubble pop, that's all. China is trying to inflate the bubble, but they will discover, I think, that this is a monster they can't contain, they just need to ride it out and pick up the pieces later.

That said, what concerns me is the contagion factor. I wonder how exposed western banks are to China... I'm sure it isn't pretty. How many of these inflated assets do they own, that's what I want to know.

 

[Peter Grimm]

That's funny! You might like to look up the definition of 'command economy', where the means of production are publicly owned. China hasn't been a command economy for decades. The worst hit sectors of the market are privately-owned companies whose share prices have depended on small, private, retail investors.

I agree that not much attention has been paid to this matter, and the stock market crash looks catastrophic and will continue to do so if it continues, but don't forget that it comes off the back of a sky-rocketing of share prices that has inflated the stock market 150% in the past 12 months. A subsequent 30% fall at the moment looks more like adjustment.

Here's a good analysis of what's going on.

China's stockmarket crash: A red flag | The Economist

Good.... the less attention paid to it the better. China are the only ones who can deal with it, and the more "attention" placed on this by our news media, the more the market will panic, the more the problem will be exacerbated

 

[Peter Grimm]

At some point you run out of other people's money.

Does EVERYTHING on this forum have to be a Right vs Left debate? Good Lord. The situation in China has nothing to do with socialism, or "spending other people's money," or anything of the sort.

The issue at hand is the role of margin, leverage, and speculation in an emerging economy.

 

[Andalublue]

Good.... the less attention paid to it the better. China are the only ones who can deal with it, and the more "attention" placed on this by our news media, the more the market will panic, the more the problem will be exacerbated

The worrying thing about it is that it appears to have been caused by the exact same practices that caused the 2008 crash i.e. margin lending, short selling etc etc. Added to which, the Chinese government appears to be panicking and reacting in a similar fashion to how the US, European, and Japanese governments reacted 7 years ago, and for similarly politically-minded reasons. Of course, this might not be presaging yet another failure of market capitalism... but the signs are slightly concerning, at the very least.

 

[SlevinKelevra]

That's because in the space of three weeks, China’s Shanghai Composite stock index has lost nearly 30 per cent of its value, wiping out some $2.3 trillion U.S. in wealth. As Bloomberg News put it, that’s a loss of $1 billion for every minute of trading. .

if it can just disappear, it isn't wealth.

 

[jmotivator]

I just checked the data, first of all... no doubt the Chinese stock market is getting absolutely slaughtered right now. They are, still, up like 100% from two years ago, though.... not that I'm in any way bullish on Chinese stocks at the moment, just pointing out that the current crash might have more to do with the inherent volitility of that particular stock market, and less to do with any suddenly diminishing values of the underlying assets.

Let's discuss how much China is up after the crash is over. Until then let's address what the current crash does to the Chinese economy and how devastating it is to the pillars of Chinese economic growth: Real Estate and outside investment. China has no experience in dealing with Market crashes, and it shows in the way they approach the current crisis. They are more focused on propping up cosmetic economic indexes over addressing underlying structural problems. I mean, in an only half kidding way, I think at this point the best tool for market correction in China is dynamite. If they blew up all the empty commercial and residential units in the country they may be able to stop the bleeding by saving the Real Estate market.

China's thing is they love margin. Their stock market has always been a giant casino. You're watching a way over-leveraged bubble pop, that's all. China is trying to inflate the bubble, but they will discover, I think, that this is a monster they can't contain, they just need to ride it out and pick up the pieces later.

Yes, but you could say the same thing about any market collapse, that doesn't make it any less devastating. I have long used the analogy of a "wing stall" for how a government should handle a market crash. In the early 1900s flying was a new skill, and pilots were learning the hard way of the danger of wing stalls (when the air running over the inside wing drops too low to produce lift in a low speed turn, causing that wing to fall and the outside wing with lift to vault the plane into a spin). In the early days a wing stall was death. Pilots struggled for years to develop a protocol that pilots could use to correct wing stalls, but nobody could think fast enough to adjust to all the chaotic gimbals that a wing stall introduced.

It wasn't until WWII that the wing stall was finally solved. The solution came from the wide distribution of parachutes. Since a pilot was now able to eject from a wing stalled plane, more pilots survived to tell the tale... and the tale was very revealing. What many pilots were reporting was that after ejecting from wing stalled planes they were left to watch their spinning planes right themselves and fly on into the wild blue yonder absent a pilot. What they learned was that the general forward thrush of the propeller and the drag of the wing and the tale slowly muted the chaotic gimbals until the plane was flying in a mostly stable direction and lift was returned to the stalled wing. Problem solved.

The solution for pilots experiencing wing stall: take your hand off the stick. Fighting only makes it worse.

That is my personal philosophy for how Government should deal with market crashes.

That said, what concerns me is the contagion factor. I wonder how exposed western banks are to China... I'm sure it isn't pretty. How many of these inflated assets do they own, that's what I want to know.

We'll find out. I know that Chinese investment was all the rage over the last few years so I would guess the contagion is substantial.

 

[jmotivator]

if it can just disappear, it isn't wealth.

Well, then that totally changes who makes up the 1%. :roll:

 

[jmotivator]

Does EVERYTHING on this forum have to be a Right vs Left debate? Good Lord. The situation in China has nothing to do with socialism, or "spending other people's money," or anything of the sort.

The issue at hand is the role of margin, leverage, and speculation in an emerging economy.

Butthurt alert!

It's no secret that the Chinese economy has been driven for years by foreign investment. They have dumped all this money into building ghost cities the size of large US cities that are less than 25% occupied.

The song has stopped and everyone has turned in a frenzy to grab a chair only to find that most of the chairs were imaginary.

 

[SlevinKelevra]

Well, then that totally changes the who makes up the 1%. :roll:

your comment really refuted the point.
:roll:

 

[Peter Grimm]

The worrying thing about it is that it appears to have been caused by the exact same practices that caused the 2008 crash i.e. margin lending, short selling etc etc. Added to which, the Chinese government appears to be panicking and reacting in a similar fashion to how the US, European, and Japanese governments reacted 7 years ago, and for similarly politically-minded reasons. Of course, this might not be presaging yet another failure of market capitalism... but the signs are slightly concerning, at the very least.

I personally just see it as the growing pains of a young Chinese stock market. They've still outperformed the S&P over the past few years in terms of growth. If not for the fear I have that Western Banks are exposed to this downturn (I haven't looked in to it but I'm sure we are), I would just chalk the whole thing up to that's what happens when you let people borrow on 100:1 margin.... you have booms and busts.

China is still growing and fundamentally strong, in my opinion. They've just inflated their asset values and now they are watching that bubble pop, but they're still growing.

 

[Andalublue]

Butthurt alert!

It's no secret that the Chinese economy has been driven for years by foreign investment. They have dumped all this money into building ghost cities the size of large US cities that are less than 25% occupied.

The song has stopped and everyone has turned in a frenzy to grab a chair only to find that most of the chairs were imaginary.

You know these are stocks of private corporations held by private investors, right?

 

[jmotivator]

your comment really refuted the point.
:roll:

Your point was stupid. Most of the wealth in the country is in investments that can and do have a way of vanishing.

I could buy $1 million in gold today and my wealth derived from that gold would be $1 million. If the price of gold drops by 20% then I lose $200,000 of wealth without losing the underlying commodity.

The losses in the Chinese stock market came from a loss in the valuation of the underlying resources.

 

[jmotivator]

You know these are stocks of private corporations held by private investors, right?

You realize the government has ordered trading of many stocks to halt, and demanded brokerages to invest in the markets even though they are likely to lose, right? Doesn't really sound so much like these private investors actually own the stocks....