Scared by the Chinese dragon

  • Italiano

For some time now, we have become accustomed to continuous news on the trend of Chinese stock indexes, at least since when there a  true collapse of the stock exchanges that have “burned” a mole consisting of billions of dollars.  Why “burned” in quotation marks, however? The answer is more simple than it seems even if the media prefer striking titles, although conceptually incorrect, in order to draw the audience’s attention. The basic concept is that, like energy, nothing is created and nothing is destroyed, on the stock exchange, occurs  simply a mutation of state; in other words, the finance does not create nor does it create wealth, but simply relocates it. This is where we will start from in analyzing what happened.

At the end of August, all of a sudden, the index of Shanghai (SSE) , the main indicators of the state of China’s finance, has suffered a sudden drawdown, as it is called in the jargon, i.e. a fall in values.  Immediately the oriental defaillance propagated to all the markets amplifying the flow rate. The news and the newspapers have reported an  almost apocalyptic image even if, in fact, on the foreign markets the consequences were much smaller than the common belief can imagine. We are talking about numbers at this point because, often, they help more than a thousand words. Let us observe, first of all, the main Chinese index. In October 2014, the SSE was quoted around 2 ‘400 points and from the end of November began a race to rise it, that ended in mid-June 2015, over 5 ‘000. It is obvious, at this point, the flow rate of the growth of the Chinese securities market, that has more than doubled its market capitalization in little more than seven months. Once those levels were achieved, a correction for “benefit” of many investors was credible, but the descent was far more significant.

Between mid-June and early July the index falls below 4 ‘000 points, losing more than 20% in two weeks, and aims at 3 ‘500 a few days later.  The volatility, i.e. the lack of a true ascending or descending trend, that is, increases in the following weeks up to generate a new collapse in the middle of August, that pushes the ESS under 3 ‘000 points in order to resume growth in the following days, towards the 3 ‘150 in mid-September, more or less what the index quoted at the beginning of the year.

As you can easily guess the financial crisis that has occurred in recent weeks has, in fact cleared the gains per year (year to date, YTD) made by Chinese that has lost, in fact, more than a third of the maximum market capitalization reached  in July to return to the levels of of the month of January, even if still with a net profit if we consider a longer period of time, let us say, over a year (year to year, members) where one can consider a profit of over 30 %.

Let us say, therefore, that the “earthquake”  unleashed in the stock, was nothing more than a violent correction of a market that had grown too quickly, as if ”doped”.   The reached values, in fact, have been pushed by a bubble of liquidity created by a very expansive monetary policy and by phenomena of the shadow banking that, over a few years, have entered liquidity in the market for more than 285% of the one introduced by the FED and the Bank of Japan together. This mass of currency must be remunerated and here, at the financial investment, it is only a short step, especially if you add the stimuli state that China has worked in order to support its stock indexes.

With a growth of over 100% of the value of investments, only with respect to November 2014, reached in June, it is evident that the operators have started to monetize invested assets and the numbers speak clearly: from mid-June the index fell in just two weeks, by more than a fourth of the capitalization. Then, there was a true collapse at the end of August.  As said before, however, the billions that left the Chinese market have not been “burned”, they are waiting for new location.

The reason why is fairly intuitive, China is entering a phase of consolidation of the internal market, too unbalanced on the export and, therefore, unable to react to shocks in foreign demand when the latter, for some reason, drops.  This is certainly not a real crisis, but a modification of the scenario. Hence, the next goal of the government will not be to attract new capital, but to build a domestic demand by pushing up the income, decreasing the rate of concentration of wealth to allow the internal demand to create a market able to compensate for the exogenous shocks.

The future of China, hence, should go toward that of a less competitive market on the level of “cost of labour” and more focused on the added value of the productions and on the creation of an inner middle class, that, today, concerns are a audience of people equal to the inhabitants of Europe but that still leaves more than a billion human beings in a state of an economy of subsistence and excluded from the market and from the satisfaction not of primary needs, but of all those aspirations that distinguish the Man from the rest of the animal world.

This being told, it would be interesting to see what effect the shake up given by China has had on the western markets. I would like to begin with the indexes of Wall Street: the Dow Jones (NYSE) and the NASDAQ. The impact of the collapse China has had an immediate impact in both indexes, bringing a drop of approximately 10% for the Dow Jones and of about 12% for the NASDAQ which, however, have reached a growing trend, reducing the loss to about 9% in the first and about 6% in the second, results that are compatible with a mere correction of the market while waiting the resumption of the secular trend of growth.

Very interesting is also the trend of the main Italian index, the FTSEMib , in this rather confused period.  As all the world’s stock markets, Milan has not avoided what one could define as the butterfly effect, the wings of a butterfly that at the other end of the world provoke a storm. On 24th August the main index has lost about 12%. Then it started to climb again and stopped at a largely positive increase of 14% since the beginning of the year. In short, the “collapse” of the Chinese index has not had much impact on the major markets in the rest of the world by considering it a cause of a mere correction at the end of the summer. Much more important will be the slowdown in the Chinese industry due to the process of consolidation of the internal market and of the reassessment of the industrial model, which will have a particular impact on the so-called emerging markets and exporters of raw materials, that will suffer an important decrease in demand over the next few semesters. In the meantime, the capital will continue to follow the promises to yield more, perhaps, between Europe and the United States which could take over an enormous competitive advantage from the opening of the Chinese domestic market with their products with a high Added value. But this is another story.

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