The Chinese equity market is not really my cup of tea (coffee?). I have somewhat of a track record when it comes to European equities and follow a few other US and UK names; enough to be able to keep up a decent conversation. However, I have always shied away from Asian markets primarily on the belief that controlled economies are by nature doomed to fail.
Admittedly, the Chinese market had shown remarkable resilience during the financial crisis of 2007/2008, especially by maintaining a subdued profile and letting the market flourish at arm’s length. The Chinese Shanghai index increase by 95 percent between September 2008 and December 2014. However, over 90 percent of this gain came in the first few months following the market collapse, that is, as markets settled back to a semblance of normality. Between March 2009 and December 2014 the Shanghai composite did not increase at all, reflecting global and domestic economic difficulties and a blunt economic outlook by the Chinese government.
By contrast, in the same period, Western monetary authorities have frequently portrayed themselves as know it all financial saviours. Up to this day the US Federal reserve has acted on the pretence that pumping an economy full of dollars and keeping it that way for a prolonged period is enough to maintain the American dream.
The UK has gone through its quantitative easing while Japan is probably the QE poster child. Europe finally has joined the fray, buying back government bonds at previously unheard of and unthinkable quantities. And despite these massive interventions, western economies still claim to be free markets. This borders on arrogance; the definition of controlled or free economy has become rather shady.
Quantitative easing is not side-effect free. It multiplies the gap between the asset holders and small savers as capital markets receive a boast while small savers are left with… cicri. As government debt is inflated-out, pensioners are left out in the cold to dry as, in similar fashion, pensions get inflated-out. Basically, the rich tend to become super rich, the poor… stay poor. Proponents of QE will say that the latter at least get to keep their jobs.
China seems to have panicked late in 2014. I cannot clearly point my finger at it, maybe the economy was getting out of hand, fear prevailed, or the Central authority’s actions to depict well-off Chinese as being unpatriotic backfired. Whatever the reason, this led to Chinese monetary easing and the inevitable asset bubble. Chinese equity markets roared by over 100 percent in less than a year. The bubble burst in June. Bubbles burst; ask any child and he will confirm the inevitable. The Chinese market fell over 30 percent within a few days.
For some reason the Chinese authorities decided that a financial bubble is a good thing or that maybe it is better than trying to explain to billions where all their savings vanished. After all, the authorities, through intent or incompetence, had sanctioned the bubble. For the last few year the Chinese central media machine supported equity markets even going as far as indicating stock picks and not allowing negative stock reviews.
After the bubble burst China tried to catch the falling knife; banning large shareholders from selling, suspending derivative markets, buying equities directly and blaming foreigners temporarily stopped the market collapse.
What will happen when these artificial measures are removed is anyone’s guise. My take is that anyone who counts still caught up in China will flee upon the first opportunity. If you want to terrorise capital markets threaten them with the possibility that they may not be able to redeem investments. Only time will tell, but I do not see Chinese markets recovering any time soon.
Disclaimer: This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.