
China’s Market Rout Is a Double Threat - chmaynard
http://www.nytimes.com/2015/07/06/business/international/chinas-market-rout-is-a-double-threat.html
======
sharetea
China is in deep trouble; it has a total debt to GDP ratio of 282%, the
highest compared to the other big gdp countries.
([http://bloom.bg/1evYSQ5](http://bloom.bg/1evYSQ5)). The housing bubble has
already burst in the 3rd and 2nd tier cities in China, and the 1st tier cities
are close to bursting. And the shanghai stock market is close to retracing
back to 2000, since the current stock market has a p/e ratio that's 41% higher
than that of US's 2000 dot com market.
([http://bloom.bg/1HNgqA4](http://bloom.bg/1HNgqA4))

When (not if) the china's stock market collapses, and the capital flight from
China accelerates (estimated 600 Billion a year currently
[http://bit.ly/1NJQuIX](http://bit.ly/1NJQuIX)), then China is going to be
permanent decline for the next 10-20 years. It would be anyone's guess what
China will do then, since it will inevitably suffer massive internal unrest,
due to the fact that it's ruled by a bunch of dictators.

EDIT: China seems to be following the same path as Japan in 1990, except China
has really screwed up their environment and rich people really want to leave
the country.

~~~
WoodenChair
There's a lot of hyperbole in this post. The graph you link to of debt-to-GDP
is actually very similar in China (282), South Korea (286), Australia (274),
USA (269), Germany (258), and Canada (247). And for the record, South Korea's
is higher than China's according to that graph. China's is more heavily
weighted in "non-financial corporate" which is interesting.

And the shanghai stock market is not "close to retracing back to 2000." This
graph shows, it's well above that:
[http://www.tradingeconomics.com/charts/china-stock-
market.pn...](http://www.tradingeconomics.com/charts/china-stock-
market.png?s=ssecomposite&d1=20000101&d2=20151231)

You're assuming both a continued free-fall at the same rates and also that p/e
ratios in China mean the same thing as they did for .com companies in 2000 in
USA. Any market newbie will tell you that what a "normal" p/e ratio is will
differ greatly by sector even within the same economy. China's may be out of
whack, but it's not fair to make an arbitrary comparison.

I'm no China apologist, but making predictions of 10-20 years of decline with
an authoritative tone is wrong given the facts you presented.

~~~
Gibbon1
I think hysteria would be warranted if the Chinese government were to take a
Schumpeter/Hayek/Mellon liquidationist response to the collapse of the market
bubble (see the US/Europe circa 1929). Why yes then you would have contagion
spreading out into the real economy and a long depression.

I'm thinking not. Instead I the Chinese central bank will inject liquidity
again, much to the horror of the WSJ Editorial board who will again sternly
warn that such actions, mark their words! come to an bad end!

 _snort_

------
jpatokal
The Economist predicted this crash in May, and has a series of good articles
about it:
[http://www.economist.com/blogs/freeexchange/2015/05/chinas-s...](http://www.economist.com/blogs/freeexchange/2015/05/chinas-
stockmarket)

China's stockmarket is sufficiently weird to defy most normal analysis though:
there are heavy restrictions on who can list and who can invest, plus China in
general has lots of money sloshing around looking for a decent place to
invest, because the usual mainstays like bank deposits have zero to negative
returns. So the bubbles and pops there (and this is far from the first) don't
have a lot of correlation to the health of the overall economy.

~~~
intrasight
>there are heavy restrictions And don't forget the fact that short selling was
illegal until earlier this year, and even now only a limited number of stocks
are allowed to be shorted.

~~~
rsync
"And don't forget the fact that short selling was illegal until earlier this
year, and even now only a limited number of stocks are allowed to be shorted"

... which means the crash will be even faster and more brutal.

Remember, short positions close by _buying_ the shorted security. This means
that in a healthy (albeit declining) market there is always buying at every
level down as shorts cover.

Limiting short selling is a misguided feel-good move ... a PR stunt that only
serves to make the pain worse.

------
Animats
The chart in that article is grossly deceptive. It shows only the last six
months of the Shanghai index. Here are the past ten years.[1] That tells you a
lot more. For one thing, that index hasn't come back to its 2008 high. That's
more significant than the current correction.

[1]
[http://finance.yahoo.com/echarts?s=000001.SS+Interactive#{"r...](http://finance.yahoo.com/echarts?s=000001.SS+Interactive#{"range":"10y","allowChartStacking":true})

~~~
tomp
The other interpretation (that I stole from ZeroHedge) is that a collapse of
the Shanghai index will again correlate with the collapse of the US markets.

------
dpweb
Ignored is the fact that market was up 150% in the preceeding 12 months of its
top. It's an extremely volatile market and a large selloff would be expected,
probably inevitable. It's still up for 2015. Not exactly a crisis.

~~~
joosters
It's lost 30% of its value, was that to be expected? Are you saying it won't
fall any further? To me, it seems that you are glossing over a large stock
market crash.

Talking about it being 'to be expected' is a nonsense. If the market is so
predictable, kindly enlighten us about what happens next, rather than being
wise in hindsight.

~~~
dpweb
They call them corrections for a reason. Extreme moves in one direction
increase the likelihood of extreme moves in the opposite direction. You can
chart volatility just like you can chart the price. Volatility is high right
now.

Corrections are not the same as crashes that wipe out 20 or 30 years of gains.
The index is still up for the year. It is very disturbing that the govt.
rushes in to attack short sellers and prop up the market artifically,
funneling money into it. They show no enthusiasm to attempt to curb the bubble
as its growing as the mkt is on the way up. In that way they are the same as
the western world.

~~~
joosters
They are called corrections some time after the event, once we've all had our
fill of hindsight. Are you trying to predict the market by claiming that it
won't fall any further? If you aren't, then how can you be sure that this is a
correction and not a crash?

Even by your extreme measures of what a crash is, you have to realise that
they don't happen instantly... who knows how long the market might sink for...
Or rebound?

------
tokenadult
Here is the latest reporting from Reuters on the opening of the stock markets
in China, where it is already Monday 6 July 2015: "Chinese stocks jump after
Beijing unleashes emergency support"

[http://www.reuters.com/article/2015/07/06/us-china-
markets-i...](http://www.reuters.com/article/2015/07/06/us-china-markets-
idUSKCN0PG06B20150706)

The article notes, "Oliver Barron, China policy research analyst at NSBO, said
it wasn't just faith in the markets at stake.

"'After the market continued to fall despite myriad support measures, the
government reached peak panic mode and must have worried that investors would
not only lose confidence in the markets, but in the government itself,' he
said." This is the new issue in China, that now any weakening in the market is
seen as a vote of no confidence in the central government. We'll see how the
next week or so of trading goes.

------
danmaz74
From what I understood, the biggest problem is that lots unsophisticated
investors (families) invested when the prices were already up, as it usually
happens with bubbles, and now they are in deep trouble. This in turn could
create big troubles in the "real economy".

~~~
adventured
That was intentional on the part of the Chinese government. They haven't been
subtle about it.

Chinese households are the only sector with a healthy balance sheet. Their
corporations are carrying epic amounts of debt in relation to GDP. The premise
was to transfer wealth from households to corporations, to improve the
corporate balance sheets (via share issuance).

------
mark_l_watson
To be honest, I spend much more energy studying the economy of my country
(USA) than China.

In the USA, we will probably have a major market corection to current "bubble-
ism" soon, and in my opinion a 20 to 25% drop in prices would deflate bubbles
and probably make things more stable. A good thing in the long term, I think.

The other good thing about the current problems like we see in China, Greece,
etc. is that it will hopefully slow down the trend of the elites making
massive amounts of money with financial transactions instead of BUILDING
THINGS and other productive activities. When the elites make money by pulling
it from the lower classes that is a bad thing; they need to go back to
building infrastructure and becoming more decent world citizens who care about
the world that their children and grandchildren will be living in.

The problems that China is facing are bad, but they do have high savings rates
and an increasingly better educated population in their favor.

It will be really interesting to see how things shake out in the next few
years. I am fairly optimistic, but we will see what happens.

~~~
seanmcdirmid
> hopefully slow down the trend of the elites making massive amounts of money
> with financial transactions instead of BUILDING THINGS and other productive
> activities

The Chinese already do this, but many of the projects are white elephants, or
infrastructure that isn't useful (as opposed to useful infrastructure, which
it still needs in many areas). How many steel plants do you need?

What China really needs is to get consumers consuming. People have to save
lots of money to buy an overpriced house or to prepare for health emergencies,
they can't afford to buy many things beyond that.

------
Eridrus
BREAKING: CHINA'S NATIONAL SOCIAL SECURITY FUND (PENSION FUND) ORDERS ALL ITS
ASSET MANAGERS "NOT TO SELL A SINGLE STOCK" \- CAIJING MAGAZINE

[https://twitter.com/george_chen/status/617903802201411584](https://twitter.com/george_chen/status/617903802201411584)

------
kev6168
Western media has a tendency to see China through a pair of gloomy glasses,
and thus often are so certain that next Tuesday is China's doomsday.

Here are ALL the headlines (contains the word "China" ) from Yahoo News in the
last 3 days. 12 out of 13 have negative words in the headline:

\-------------------

Xi Jinping has run into the one thing in China he __can’t control__

China's Boom Has World Bank __Worried__

The South China Sea is now a 'core interest' of Beijing — and that's a
__problem__ for its neighbors

China’s __aggressive__ posture toward the South China Sea has been __stirring
tensions__ in the...

China hunts for "manipulators" as stocks __tumble__

Is ‘China in Africa’ something to __fear__?

China __angered__ by new U.S. military strategy report

China says tourists __attacked__ in Turkey during __anti-China protests__

China Has World’s Fastest Trains, U.S. Lags

China’s __insatiable appetite__ for power

Zeroing in on __empty homes__, China throws developers a lifeline

S. Korean official falls to __death__ in China

China's __Unsettling Stock Market __Collapse__

\-------------------

I wanted to record the headlines for a month, produce a fancy chart and
demonstrate how extreme and rampant the bias is, but I keep forgetting about
doing it. Besides, it's probably well known that most media outlets from any
country (including the USA) are shit, so why beat a dead horse? Before you
shout "foul", I agree we can debate all day on whether a particular word
really has negative connotation. Oh, China's media outlets are shit too, even
shittier.

As long as we get information from as many diverse sources as possible, we
should be fine. The problem is majority of folks has been fed biased
information since childhood, and once a system of beliefs and images is
established it's nearly impossible to shake it off.

~~~
snowwrestler
This is only insightful if you do the same thing for other countries as
headline subjects and then compare the _relative_ rates of negativity to see
if China is an outlier.

News headlines tend toward the negative in general, because it's not
newsworthy when things work like everyone expects them to.

~~~
kev6168
my original plan was to pick 5 news outlets from each of the top 20 powerful
countries, grab headlines for a consecutive 30 or 60 days, and come up with a
negativity value from country N towards country M, so the final result would
be a 20X20 matrix. Too much work, so it's not done yet.

But based on my years of experience in consumption of news from major media
outlets in the world, the relative rates of negativity towards China is in the
vicinity of 12/13, i.e., extremely high and very much an outlier. Of course
it's just my guesstimate and gut feeling.

------
matchagaucho
Could the headline here just as easily be "Chinese stock market drops down to
March 2015 levels"?

------
woodpanel
Anti-China hyperbole.

Every pseudo-economist-nerve of mine tells me that one day China inevitably
will crash and when it happens it will hurt us all.

But please, enough with the nitpicking in search of ideology affirmation.

Why this is not the crash everybody's waiting for? It's a stock market that is
about to crash-out it's volume that was gathered just months prior. Not enough
time for most of the worlds shareholders to incorporate Chinese prices into
their portfolios.

The Chinese stockmarket's prior boom was mainly driven by the HK-SH stock-
market link, allowing foreign investors to buy Chinese stock. Combine that
with

\- the assumption of risk-takers that the world would flock in gazillions to
buy Chinese stock

\- and the lack of investment options the ordinary Chinese people have to put
their savings in

and you got your self a little bubble going.

But that bust (which is not close to eliminate the prior gains yet, btw) is
not the bust we're rightly fearing. Not every economic accomplishment of China
can be discredited just by the immorality of its leadership.

~~~
seanmcdirmid
That bust could set off a domino chain reaction, which is why the leadership
is so desperately and shamelessly trying to prop it up. There aren't many
other signs of optimism for the "new normal", and I'm a bit worried about what
will happen next.

------
cft
In the future, the big news that will move American markets will increasingly
come from China. I wonder what this does to American indexes tomorrow.

~~~
sfrechtling
Hard to tell with the noise out the Eurozone. Together, the next week will be
a bit of a bumpy ride.

Definitely agree with your first statement; maybe you should look towards
Australia as an example country that over the past 5 years has been
increasingly following Chinese financial markets (Commodities and now
property).

------
curiousjorge
vast majority of Chinese firms trading on the Chinese stock exchange offer no
transparency, and with the recent scandals involving phantom companies valued
at billions and "anti-corruption" moves is causing sell offs and capital
flight.

But this is hardly the concerning part, what is apparent is a loss of market
trust in the system from the public and abroad. If China is to become a
superpower, it cannot play by it's own rules.

~~~
dear
"China is to become a superpower, it cannot play by it's own rules."

A superpower by definition is it plays by its own rule.

~~~
socceroos
Yes, and no.

Yes in that a superpower does bend the rules to suit themselves.

No in that a superpower is suddenly held to a higher standard than the rest of
the world. You'd need to resort to expansionism if you wanted to continue the
way that China is right now.

~~~
dear
Which superpower is being held to a higher standard right now?

~~~
socceroos
USA. Whether or not they're living up to it is another thing altogether
though.

~~~
dear
See! Your "No" is really a "Yes".

