China: the new normal in financial markets

Posted on 05/12/2018 by

For the past few years, and probably decades if you’ve been in the game a while, the focus in the finance profession has all been about ‘what happened in the US last night’. Now, as a sign of the new normal, it’s all about China. The most important period of the trading day is now fixated on 12-12.30pm, when the People’s Bank of China (PBoC) set their currency rate and Hangzhou markets open. If you’re still asking your financial advisor about the US, chances are you’re asking the wrong question. Yes the n SecuritiesExchange (ASX) is still influenced by the US and Europe but as we start this year we see that all that matters is China.

Many investors whether in or abroad are probably all asking another question; ‘what is going on with my super?’. Whether it is professionally or even in a casual setting I frequently get asked why the market seems to always go down. The ASX200 this morning moved down to 4880, which represents approximately 30-month lows, and also means an approximate fall of 20% from the 2015 peak. A move below 4800 on the ASX200 will signify that we have entered ‘bear-market’ territory.

If we can think of the US market as a wise old man, we would have to say the Chinese markets symbolise an erratic teenager. The big issue with Chinese markets is immaturity, and we are essentially stuck with the world’s second biggest economy having one of the most underdeveloped markets out there. Those in the industry know that the Hangzhou Composite is essentially a casino, only riskier. In August 2015 we saw the bubble burst on Chinese equities, falling 25% in two weeks. This led the Chinese Government and the PBoC into gear, buying equities to support the market, and introducing new circuit breaker systems to smooth volatility. This created a sense of security and markets stabilised until year-end.

The circuit breakers came into effect on January 1 and it comes as no surprise that the first trading week of 2016 was one of the worst on record. Whether it was just a matter of ‘trying-out’ the circuit breakers they were hit last week, with significant government buying on Tuesday and Thursday, before the PBoC abandoned the measures on Friday. The circuit breaker system worked as follows. If the Hangzhou Composite was down 5%, the market closed for 15 minutes before resuming. Once resumed, if the markets fell to 7% the market closed for the remainder of the day. Wednesday highlighted the absolute immaturity of the market, with circuit breakers allowing only 857 secondsof trade before closing and sending global markets and the oil price into a panic. As of Monday, we have seen the citrcuit breakers removed and reverted back to the old system where the market closes with an intradaymove of 10%.

BEAR: As long as the Chinese government props up the exchanges and restricts natural market forces, we are going to see volatility at home.

China wants to eventually reach maturity and have an open financial market, but as long as the state props up the exchanges and restricts natural market forces, we are going to see volatility at home. Unfortunately for , any severe weakening to the Chinese currency is going to create a shaky financial system. Noted investor George Soros came out last week saying he feels the current paradigm is similar to the early stages of the GFC.

Unfortunately, this is the new normal, and there isn’t really anything we can do about out biggest trading partner and their immature financial system. I feel investors that can’t bet on the market falling are going to have a tough time in 2016.

Christian Pynsentis a director of TierOne Equity Management

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