Share market is a slave to clumsy China

Posted on 22/01/2019 by

Some brave investors will be picking that now is the bottom of the market. China’s stock market needs to grow up.

When it comes to markets, be they equities or currencies, China is like an over-sized child with enormous power and clout but not much experience. Faced with a problem it is clumsy in trying to fix it and with little sophistication and poor communication. The trouble is its oversized influence is leaving chaos in its wake on international financial markets.

Since the New Year, China has played with its currency a few times by imposing – and then abandoning – restrictions on its stock market.

All that China central is attempting to do is mature as a financial market and as an economy; to properly manage the value of its currency and to achieve orderly movement of share prices on its equity market .

Rather than being another salvo in a currency war – which is how some have characterised it – China appears more likely to be simply (and rightly) attempting to internationalise its currency.

But the suck-it-and-see approach is resulting in gyrations around the world that are so large and international investors are in turmoil – fixated on the trillions of dollars that have been wiped of share markets.

Thus the developed, mature financial markets have become hostage. As one commentator noted this week, “China needs to fit decades of capital market learning into a handful of years and there is no doubt that the road from a planned economy will be a little bumpy.”

What started out as an ugly new year week on the stock market got decidedly uglier this week and already $103 billion has been wiped off the value of the n market.

On Mondaythe People’s Bank of China moved to strengthen the currency in an attempt to shore up the market. A small glimmer of improvement in the n market at lunch time on Monday was short lived and it started to fall again on the back of another slide in the Chinese equity index as the news of its weaker than expected consumer inflation numbers hit trader screens.

By late afternoon n stocks started to pare back some of the losses but closed down 1.2 per cent.

China is now such an integral part of the world economy that the devaluation of its currency is seen as a signal of a weakening of its economy. (To be fair the fact that China is slowing is not new. It has been doing this for a couple of years as it moves to a consumer-led economy. Like the management of its financial markets – this process has not been particularly smooth.)

The latest panic has come on the back of fears that China may experience a hard landing.

Such an outcome is scary for most economies and in particular those like whose engines are the export of commodities that China soaks up.

And this explains why ‘s large producers of iron ore, like BHP BIlliton (which is now at an 11 year low), Rio Tinto and Fortescue have borne the brunt of the share price plunge. And fears of a continued slow down in China’s growth has also fed into the collapse in the oil price which was already in free fall thanks to over supply. This accounts for the share price pressure on the likes of Origin.

From a currency perspective – is seen as a proxy for China which explains why the n dollar is under pressure and has now tested levels below 70 cents.

The question that always emerges for investors in the midst of a share price rout is whether they should jump on the bandwagon and sell, hold on for the ride or double up their bets.

For those that subscribe to the China hard landing view, selling out of the stock market would be the safest outcome.

It is generally about now that the gurus of investment pop up and tell investors that the market is looking cheap and it’s time to invest. Maybe they are still sitting around the beach on deckchairs butthere are not too many out there pushing the buy-now barrow.

If one blacks out the part of the n market that is directly involved in selling commodities to China – the remainder of the economy is not in bad shape..

Macquarie Equities was one of the few institutions to go out on a limb yesterday and call an improvement in the ASX over the next 12 months.

“Despite an abundance of risks (Chinese growth and currency, US interest rates and credit markets) we think the market can finish 2016 meaningfully higher.”

It makes the point that the time to sell was when the ASX200 was 5900 not when it was 5000. In other words, those that didn’t sell then have missed the boat.

Some brave investors will be picking that now is the bottom of the market and be on the hunt for bargains.

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