Nightmare on China’s Wall Street

The nightmare on China’s wall street is returning, three years after China’s last futile attempt to save its stock market. On Tuesday, 1,023 companies fell by the daily 10 percent limit amid concerns over escalating trade conflict with the U.S. Already among the worst performers in Asia this year, the benchmark Shanghai Composite Index plunged 3.8 percent to bring its 2018 loss to about 11 percent.

This time around, China’s experience isn’t so unusual. There have been stock bloodbaths from Indonesia to Vietnam this year. In spring, the MSCI Emerging Markets Index dipped below its 200-day moving average for the first time since 2016. Where China is unique, though, is in authorities’ exaggerated attempts to calm nerves.

Immediately after Tuesday’s slump, the People’s Bank of China posted a Q&A on its website with new Governor Yi Gang, who said the sell-off was purely sentiment-driven, and that China’s macroeconomic situation was sound. Speculation is growing that the central bank will soon cut reserve requirements.

chinas wall street

Earlier the same day, the China Securities Regulatory Commission said that Xiaomi Corp. can issue China depositary receipts only after its Hong Kong initial public offering, frustrating the smartphone maker’s ambitious plans for a dual listing. The statement essentially brought all prospective CDR sales to a sudden halt. Chinese IPOs have pressured benchmark indexes because investors tend to sell shares to buy into the latest hot offerings, lured by the near guarantee of a first-day pop.

That’s not all. On Wednesday morning, the four state-owned financial newspapers all printed editorials telling investors to keep calm and carry on. “China A-shares do not have the basis for sustained decline” was the front-page headline in the China Securities Journal.

These maneuvers all sound very familiar, and we are anything but assured.

Rewind three years. On June 28, 2015, about two weeks after A shares began a rapid decline, the PBOC slashed its benchmark interest rate by 25 basis points. By July, the securities watchdog halted all listings. And state-owned media ran a series of editorials seeking to soothe anxiety.

All we’re waiting for now is for Beijing to to blame foreigners for short-selling, while killing the world’s biggest stock index futures market. Then we’ll have a carbon copy of the last rout. Don’t be surprised if the rhetoric once again turns vitriolic in the event the slump deepens.

None of those desperate maneuvers worked. The invisible hand pulled the Shanghai Composite down more than 40 percent in the space of two months in 2015.

We all know that back then, China’s markets were way overvalued. This time, a different demon is at work. To prevent its Minsky moment, China is slashing corporate debt, which necessarily comes at the expense of economic growth. In May, aggregate credit increased by only 10.3 percent, the slowest pace in five years.

Meanwhile, U.S. President Donald Trump’s trade war is coming at an awkward time. His threat to impose tariffs on another $200 billion of Chinese imports could shave as much as half a percentage point from the nation’s GDP growth.

The truth is that China’s stock market was weak even before the tariff flare-up because defaults are popping up everywhere as firms struggle with refinancing. In the past, companies that failed to pay were mostly from unloved old-economy sectors. This year, we’re even seeing delinquent technology firms. If bondholders don’t get their money back, what can stock investors expect?

Against this backdrop, China’s planners — from the central bank to the party’s media mouthpieces — are reverting to old habits. Their efforts look as amateur as ever.

To quote the philosopher George Santayana: Those who cannot remember the past are condemned to repeat it.

– Bloomberg