The new year began with a surprise, all financial markets opened with a sharp decline after the first day of the year, which has continued unabated so far. Usually, in fact, the first day of the year is characterized by large purchases on the markets to invest the liquidity obtained from December deadlines, but something seems to have gone wrong. If we look at the stock markets which were closed after the Twelfth Night, we might think it is a major financial defeat driven both by geopolitical uncertainties in the Middle East and by fears created by the insane arming race of a tyrant at the head of a poor little state, which has invested big bucks these last years to acquire new military technologies and, especially, by the slowdown in ‘Chinese economy.
But is it real? Let us begin with the Chinese question. In recent years, we have got used to thinking of the former Empire of the Dragon as a quickly growing economic power, ready to become the world leader in economy, driven by a very strong industry and very strong foreign investments on its territory. Growth rates were phenomenal but, truth to be told, it is easy to bring growth to high levels when you start from scratch or almost so. What is really difficult, is keeping it.
Despite the myths about rapid growth and overtaking US as a global economic leader in the near future, which have appeared about China over the past twenty years, the GDP of this country is just a bit over half that of the US or four times the GDP of Italy; this is why the most interesting data concern the per capita GDP, numbers which indicate how much wealth a truly national system can generate, and which in China is about 13’200 USD (compared to 54’300 in US or 35,000 USD in Italy).
To conclude this digression, we might say that what is happening today in China is nothing but a consolidation of the market, not a collapse (a growth rate of 6.5% is expected in 2016), but a slowdown – partially wanted to allow the creation of an internal market – is the only basis which can ensuring sustainable development in the future and rebalance the growth pattern so far supported by the Government and by local entrepreneurs too unbalanced towards exports. It involves the reduction of the levels of production and that those of import of raw materials and energy to focus on domestic investment in infrastructure and income redistribution, so as to back the creation of a “middle class”, which has been always the main development drive in modern states and avoid exogenous shocks coming from external demand, which could also block the internal creation of wealth.
What is truly destabilizing the markets, however, it is the attempt of Chinese leaders to offset the slowdown in the growth rate with very aggressive strategies in the currency field, probably reaching another devaluation of the Yuan/Reminbi. The latter has prompted investors to liquidate their positions on the Chinese markets and convert these funds into currencies which are considered to be safer, such as the dollar or the Yen, in order to limit the risk of possible losses in real terms resulting from the depreciation of the currency. The Chinese government, to protect the main supports of the main index, introduced a locking mechanism of trading for over 24h in case volatility exceeds a certain threshold: similar mechanisms are used in almost every regulated market, but not for such long lapses of time. As a consequence, all the orders expiring in the period of suspension are cancelled and all the derivative contracts whose key to usefulness is time, are rendered ineffective. All this has triggered a preference for liquidity in each operator or fund that had open positions on China, pushing massive sales.
Ultimately, we might say that the “slow down” in China’s growth caused this little financial crisis which began in 2016, as mentioned earlier, was widely expected and already “priced in” by the markets, but Beijing’s introduction of almost amateurish tools of control of the financial markets, which have only created uncertainty with regard to the premises of the lists. To this we must add the geopolitical issues and the oil “war” triggered by Saudi Arabia to knock out of the game the American Shale Oil companies is pushing crude oil down, below 30 USD/barrel, with serious financial damage for all the major countries producers, including Saudi, in which oil export is the only source of income.
This scenario creates only uncertainty and the markets do not like uncertainty, prompting traders to choose the only safe asset: cash.