It’s been an odd couple of days on the Asian markets, with investors lurching wildly between optimism and fears of a lasting downturn on rumours that the country’s central bank is preparing to take a hard line on liquidity.
At once point today (Shanghai is seven hours ahead so markets are already closed), the Shanghai Composite Index had dropped by 5.8%, following a 5.3% slide on Monday.
Worrying stuff for an economy seen as one of the world’s strongest. Things kicked off last week when China’s central bank, the People’s Bank of China, took a hard line on weak banks, saying they should improve their balance sheets and refusing to pump liquidity into the central money market despite soaring interbank lending rates, creating a ‘cash crunch’.
That was followed by a bizarre article in the People’s Daily– the Communist Party’s state newspaper – which argued that capital market regulation in the world’s second-largest economy is ‘fundamentally flawed’ and that the Shanghai stock market is ‘a creature only capable of gobbling more up, never of discharging anything, and now suffering from an intestinal obstruction’.
An oblique (and rather unpleasant) reference, there, to the Shanghai bourse’s ‘too big to fail’ culture: when companies – and banks – need help, they tend to get it. No more, though: the article said the Chinese central bank would not be the ‘wet nurse’ of the financial markets – ie. any liquidity banks thought they’d get to reduce interbank lending rates is very unlikely.
The question Chinese investors are asking (and conspiracy theorists are convinced of) is whether the Chinese government is hell-bent on engineering a credit crunch. It’s an odd thing for a government to want to do, but then again with an odd mix of Communism and a free market, China is an odd country. With GDP growing by 12.3% last year and 23.5% the year before, it can handle a slight slow-down in growth.
So rumours that President Xi Jinping is preparing China for heavy structural reforms are unlikely to be quelled. This determination not to yield to banks’ demands is apparently supposed to send a message that the government won’t give in, no matter what happens, so they’d better be ready for the introduction of long, slow changes.
By the afternoon, things had calmed down markedly, suggesting a degree of reluctant acceptance by the markets. Once bourses had closed, the PBoC quietly added that the sell-off had been due to ‘temporary seasonal factors’. Market hayfever, if you will.
- Image: Flickr/calwhiz