If China wanted to restore market confidence in its ability to handle a deteriorating economy, it’s not doing a very good job. Yesterday, the authorities announced they would abandon plans to prop up the stock market. The Financial Times reports:
‘China’s government has decided to abandon attempts to boost the stock market through large-scale share purchases, and will instead intensify efforts to find and punish those suspected of “destabilising the market”, according to senior officials.’
After wasting around $200 billion in trying to fight the bearish trend, China now wants blood. Because if it wasn’t for people talking the market down, then stocks would go up forever.
This is a childish and naïve move. China should simply follow the west’s lead…that is, ensure most market commentators have a vested interest in the market doing well. If anyone disagrees, just dismiss them as a doomsayer and ridicule their point of view.
It seems to work pretty well here, as you’ll see below.
Instead, China’s doubling down on its mistakes. According to the FT article, China’s authorities think they mishandled the stock market crash not because it was the wrong policy, but because they allowed too much information to become public!
And people misused that information. From the UK Telegraph:
‘The Chinese authorities have taken unprecedented steps to silence criticism and calm markets in the wake of the “Black Monday” global markets crash, it emerged on Monday.
‘Almost 200 people — from journalists to brokers and regulators — have been arrested and even paraded in public in what Beijing said was a campaign against those who spread rumours and undermined faith in the country’s stock market.’
While this may seem amusing, or farcical, it’s actually an important development. That is, it continues the recent theme that China’s economic managers are not as astute and all-powerful as we want to believe.
And in this fragile global economy, belief is everything. We are nearing the end of the post–Second World War system of global economics. It may still have some life left in it, but if you step back and survey the damage of the past few years, you can see the writing on the wall.
It’s only the collective belief that everything is alright and will continue as it always has that helps keep things ticking along. But with each chip in the belief structure, systemic breakdown comes one step closer.
One of the biggest belief structures in global finance is that the US treasury bond is a risk free asset. But what if the emerging market rout continues and foreign central banks, including China, unload their treasuries, pushing yields on US bonds higher?
I discussed this issue in yesterday’s Markets and Money. Foreign central banks hold nearly US$6.2 trillion of US government debt. This is the result of decades of recycling trade surpluses back into the US economy. It’s a dynamic that gifts the US low interest rates and allows ongoing consumption. In short, it’s the US’s ‘exorbitant privilege’, which comes from having the world’s reserve currency.
The largest owners of US government debt are China and the rest of Asia, along with the OPEC oil producers, who for years recycled surplus US dollars from high oil prices back into US treasuries.
But the emerging markets of Asia are no longer accumulating US debt. According to Bloomberg, China sold around US$315 billion in treasuries over the past year. And with oil prices now so low (despite this week’s big rebound) former buyers of US debt in the Middle East are sellers, as oil revenues no longer cover their costs.
So you’re seeing the early stages of a major reversal in a decades long trend. Yet very few understand the significance of this development. They simply believe that US debt is the global risk-free benchmark, and that nothing will change this absolute truth.
In finance, there are no absolute truths. Everything is finite, including our belief systems.
Maintaining belief is alive and well in Australia too. Joe Hockey, Australia’s chief economic cheerleader, shows the Chinese how it’s done. From the Financial Times again:
‘Australia is on track to surpass 26 consecutive years of growth, according to its treasurer, swiping the modern-era record from the Netherlands despite a slowdown in its biggest trading partner, China.
‘In a bullish forecast, Joe Hockey said the economy was benefiting from capital inflows from China in response to recent stock market volatility and dismissed concerns that Australia was now too reliant on trade with Beijing.
‘“Cassandras are loud, whereas optimists are getting on with the job. We are going to break the record and go beyond the Dutch,” he said. “Our growth is somewhere between 2 and 2.5 per cent and that’s with the biggest fall in the terms of trade in our history.”’
Hmmmm, something about pride coming before the fall springs to mind…
On Wednesday, the Bureau of Statistics will release the national accounts for the three months to June 30. The economic growth numbers will probably be poor. The only thing holding growth up right now is household consumption. But whether it can continue growing strongly is questionable.
Joe Hockey reckons our economy is benefitting from inflows of Chinese capital. If you think selling off prime property to fund a debt addiction is ‘benefitting’ the country then — well, what can you say to that?
The man is delusional. He’s taking anything he can get. Our nation’s Treasurer endorses selling assets to fund a lifestyle we can’t afford. I guess you could say it’s an ‘optimistic’ interpretation of events. It’s also highly irresponsible for someone in his position.
Joe Hockey: Telling it like it isn’t.
What Joe needs is a good Cassandra to tell him how it is. He could do worse than read Vern Gowdie’s latest book on the End of Australia. Have you ordered your free copy online yet? Perhaps we should mail one to Joe?
Editor, Markets and Money