China’s Stock Market Crisis Continues

Investors hope the U.S. and European markets are stabilizing after Monday morning’s free fall, but China’s stock market dropped again on Tuesday. It looks as if the parachutes are finally popping, as the AP reports the Shanghai Composite rallied from a 6.4% drop on Tuesday morning to a 4.3% loss by midday. This follows an 8.5% plunge on Monday, the worst performance in eight years.

Other Asian markets appeared to be stabilizing:

In Tokyo, the Nikkei 225 index was up 0.9 percent at 18,702.66 in afternoon trading after dropping 4.6 percent the previous session. Hong Kong’s Hang Seng, which also lost 4.6 percent Monday, was up 1.6 percent at 21,595.74. Sydney’s S&P ASX 200 advanced 1.4 percent to 5,073.20 and Seoul’s Kospi was steady at 1,829.06 after shedding 3 percent the previous day.

The AP quotes a market analyst suggesting it was difficult to predict what happens next because it is not entirely clear why Monday was so bad. “A coordinated policy response is critical, and much of this needs to come from Asian economies,” said Bernard Aw of IG Markets. “A spate of better economic news may help to allay concerns that global growth is not deteriorating. Certainly, improvements in the Chinese economy will be welcomed.”

Well, sure–but what if no such improvements are forthcoming? What if investors are no longer willing to believe the Chinese government (to the degree they ever really did) when it claims improvements have occurred? What if the tools used by governments around the world to hide the true state of their economies have degraded so much from overuse that stimulus jolts and currency manipulations do not work any more?

An awful lot of the world economy has lately been riding on the price of oil, which the AP notes rebounded from “steep declines” on Monday. Lower oil prices make economic planners nervous–but they’re also one of the major reasons consumers do not feel the effects of wage stagnation and whatever we’re supposed to call inflation, now that we can’t call it “inflation” any more.

If we assume that much of Monday’s panic was a result of uncertainty about where China’s economy is going, and what the authoritarian government will do about it, the fact that they’re falling back on traditional market manipulations will either be reassuring or terrifying, depending on whether investors think those cards have been played too often.

After a period of hesitation that rattled investors, Beijing “cut interest rates for the fifth time since November and lowered the amount of cash banks must set aside, falling back on its major levers to stem the biggest stock market rout since 1996 and a deepening economic slowdown,” according to a Bloomberg Business report:

The acceleration of monetary easing underscores policy makers’ determination to meet Premier Li Keqiang’s 2015 growth goal of about 7 percent. The risk of capital outflows and tighter liquidity after China devalued its currency on Aug. 11, weaker-than-forecast economic readings, and a 22 percent stock market plunge over four days added pressure for more stimulus.

“The government has stopped using unconventional intervention in the stock market and decided to use more traditional and more market-based methods to boost market momentum and help the real economy,” said Lu Ting, chief economist at Huatai Securities Co. “Beijing has released some positive signals and these will help global stock markets. Using monetary easing to drive stocks and the economy is a method more acceptable to international capital markets.”

There you have it: no more “unconventional” market interventions, so we’re back to the conventional variety. Mark Williams of London-based Capital Economics Ltd. thought China’s move might halt its market slide, “but we suspect the primary motivation is to shore up confidence in the state of the wider economy.”

What if such confidence is not warranted? That’s a question not just for China, but for the entire industrialized world, which has become comfortable with a high level of central planning and market manipulation. At some point, it becomes difficult to pretend that economies which require a steady intravenous drip of government subsidies and currency tricks are healthy, let alone prosperous.

Authoritarian regimes that can literally order their media not to report bad economic news can sustain the pretense a bit longer–provided international investors still believe they can make money by playing along. The UK Independent relates accusations that Beijing ordered China’s largest search engine, Baidu, to censor news about the “Black Monday” market crash; users are even shown a disclaimer that some of their search results do not show, “due to related rules and policy,” while the state-run Xinhua news agency somehow forgot to report some of the worst news.

This sort of thing works until suddenly, one day, it doesn’t. Conventional wisdom holds that what people believe about a market is at least as important as what is actually happening within it. In China’s case, there is a widening gap between what investors claim to believe and what they really think. With luck, the current market crisis will stabilize soon–as illusion and perception are brought more closely into alignment.