A quote I saw a few days ago has stuck in my mind: “what happens in Beijing won’t stay in Beijing”. We should be pretty acclimatised by now to Chinese market sell-offs, a super volatile oil price, geopolitical instability, and to a marked slowdown in global growth. And yet the Dow shed more than 1,000 points in the first week of trading of 2016, both the Dow and the S&P 500 are around 10 per cent down from their recent highs, and a number of European indexes are off 5 to 10 per cent in early January trading.
China publishes a slew of data this week. Some of my guests argue that the data, even if it moves markets initially, won’t make a difference as it’s already expected to disappoint. But the statistics are part of a bigger picture as to why global investors are suddenly so nervy and selling pretty much everything except bonds. So why is China having such a big impact?
First, you would do well to remember that China is the world’s second largest economy. And if an economy of that scale faces a hard landing, it will resonate around the globe: manufacturing stalls, world trade flows are impacted, investment is put off, and capital flows shift paths.
Second, what will the Chinese government be doing tomorrow? It’s a Communist state, and Communist states are used to controlling everything. But can they control their markets? If people lose faith in protocols that the state is putting in place, the situation becomes hairy. During the recent market volatility, authorities decided to stop using circuit breakers – measures which were supposed to keep the markets from incurring huge drops in a day. Instead of stabilising markets, however, it just led to a broader sell-off. On top of that, the China Securities Regulatory Commission extended a ban on sales by major shareholders. Again, instead of aiding stability, it simply led to a smaller shareholder stampede towards the exit.
Third, does Beijing still want to engineer a sharp drop in the yuan? Initially, the local currency was allowed a competitive devaluation – only then to be guided higher by authorities. Suddenly safe-haven currencies, like the yen, look very tasty to many, and don’t be surprised if we see more positions unwinding through the year. The South African rand has already collapsed to record lows with Japanese investors selling out of their long positions in exchange for dollars, only to then sell dollars for yen.
Fourth, continued capital flight. Bigger local Chinese investors are not going to keep all their money at home while waiting for clarity on what the new improvised rule book of Chinese investing is. My guests have been telling me that US assets could benefit from new capital inflows from Asia.
Closing out the end of last week, I asked viewers to tweet their thoughts on whether the Shanghai Composite really matters to international investors. One viewer, Steve, replied: “Yes. Because if the Shanghai Composite was up 5 per cent, world markets would be flying”. So keep your eyes on China, and here’s to a good 2016!