- For China this is a necessary stock market correction - not an economic implosion
- It's not a harbinger of a new global crisis - just a sign we never really got out of the last one
- The outlook for everyone is bleaker than many thought - but probably less so for China than Europe and even the US
So what’s the real story behind the made in China Black Monday (followed by a Blue Tuesday)?
Shares in the Shanghai/Shenzhen soared a whopping 150 percent in the 12 months up to mid-June. Small investors – almost 80 percent of the market – believed in a never-ending party, and often borrowed heavily to be part of the “get rich is glorious” bonanza.
There had to be a correction. Those shares – which had hit a 7-year peak - were obviously overvalued. Couple it with a mountain of data showing essentially a Chinese economic slowdown, and the result was predictable; Shanghai and Shenzhen lost all their gains so far in 2015 – and engineered a massive global sell-off. Even notorious billionaires lost, well, billions in a flash.
Welcome to China’s new normal; or our brave (miserable) new normal world.
The crisis of the Neoliberal Disorder
The sharp correction in the Shanghai/Shenzhen is part of the end of a cycle. Goodbye to China relying on investment rates of 45 percent of GDP. And goodbye to China’s unchecked thirst for commodities.
The problem is China’s tweaking of is economic model is directly linked to the persistent coma of the neoliberal disorder, in effect since 2007/2008.
You don’t need to be Paul Krugman to know the new normal is anemic global trade; a severe crisis in most emerging markets; Europe’s absolute stagnation cum recession; and “factory of the world” China selling less to the rest of the world.
Meanwhile, the hyper-valued US dollar is strangling US exports; up to 3 percent decline in the first semester alone. Imports also fell by 2.2 percent; and that ties in with the structural corrosion of America’s dwindling middle class spending power.
Everywhere we look, the whole structural landscape screams crisis of the neoliberal disorder. When the Chinese engine of turbo-capitalism faces (relative) trouble that glaringly reveals how the global financial casino enjoys no dynamic support anywhere else.
Over $5 trillion in paper money has been wiped out since Beijing (modestly) devalued the yuan on August 11 – triggering the global sell-off.
Now the Fed may postpone raising interest rates for the first time in almost a decade until the end of 2015. Still, no one dares to predict a rosy growth scenario, considering an ultra-strong US dollar, a relatively devalued yuan and a steady fall in oil prices.
No implosion, no panic
Contrary to Western forecasts/wishful thinking, China is not imploding. Credit Suisse has released some quite level headed analysis. Here are the highlights.
“China still has a very healthy current account surplus, its capital account is still partly closed and its major financial institutions are largely state-owned. These factors combined would allow the monetary authority a free hand to create liquidity in the system if it wants to do so.”
What will happen is that “China's structural growth will continue to decelerate in the next few years.”
There won’t be a “credit-crunch triggered hard landing and the financial system/ exchange rate regime could be maintained relatively stable.”
Hoping for Chinese corporate revenue/earnings growth to “bounce back to the level of few years ago is unrealistic.” But, crucially, “the fear of a repeat of the 1997 Asian financial crisis or a 2008 global financial crisis is not warranted.”
And to sum it all up, Credit Suisse recommends…no panic; “Investors [should] focus more on China/HK stocks that have strong micro fundamentals and are less susceptible to Chinese economic growth, but were dragged down by recent market weakness.”
A black hole in Jackson Hole
So, from Beijing’s point of view, everything is (relatively) under control.
Once again; in global terms, this latest casino bubble is not remotely comparable to the Asian financial crisis of 1997/1998. Rather, that’s yet one more intimation of non-stop, recurrent global weakness enshrined as the new normal, coupled with Wall Street’s absolute refusal of strong financial regulation.
The ball now is in the Fed’s court; what to do about the tsunami of foreign money driving the US dollar up, and driving US industry to become totally uncompetitive.
The era of central banks printing electronic cash in a QE free-for-all – cheap money directly boosting “market volatility” – may not be over, yet. Let’s see what happens this Thursday, when a symposium of central bankers in Jackson Hole, Wyoming, will be examining what to do about “market volatility”.
Central banks absolutely love to drive up stock market prices for the benefit of the 0.0001 percent. So expect more delusion ahead. But be sure everything that’s solid melts into air. Including the neoliberal dream.
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