China Stock Market Suspension Ushers In A Tough 2016

China’s primary stock markets in Shanghai and Shenzhen were suspended today after plummeting during the morning of a volatile first day’s 2016 trading. The suspension, which is active for 24 hours, is triggered when markets rise or fall by more than seven percent in a daily session. This so-called ‘circuit-breaker’ was introduced at the behest of the Chinese Securities Regulator just last September; today is the first time it has been enacted. The fall was pre-empted both by a decline in China’s manufacturing output for the tenth consecutive month, and the imminent lifting of a suspension of trading in China’s own publically listed State Owned Enterprises, which have in turn been suspended from trade since the summer due to “negative sentiment” concerning their viability. At the time, several journalists were also punished for “creating uncertainty” in the markets as share prices fell. It is unclear what policies Beijing has managed to implement since then that makes this situation any better.

This volatility was discussed during Andrew Polks 2016 economic preview on China Briefing here last week.

However, it should be noted that the current situation is effectively a Chinese domestic issue, and should not impact upon foreign investor sentiment. The Chinese stock markets behave in a different manner to those in the West, meaning that sentiments, positive or negative concerning movements of Chinese stocks, should not impact upon market sentiments in say New York or London. This is because these operate in fundamentally different ways. In China, the government acts as regulator, owns the exchanges and, via the listing of state owned enterprises, most of the companies traded on them. The traded stock remaining on the exchanges is only permitted to be held by mainland Chinese nationals, with foreign investors effectively barred from participation. This is in stark contrast to the behavior of the New York, London and similar exchanges, where true international market sentiment – and a rather larger degree of transparency exist.

This alone suggests that there should be little sentiment actually imposed on Western exchanges due to volatility in China. The fact that in the past there has been is largely due to the influence of poorly informed analysts suggesting a more tenuous link between trading in Shanghai and in London that really exists. In essence I am suggesting it is better to ignore the specific China stock market data when it comes to assessing the more mature markets, and look instead at the fundamentals driving the economy. Market sentiment in New York or London “because of what’s happening in Shanghai” are not grounded in effective research, and if your broker suggests otherwise – find a better broker.

Regarding China, the overarching position of the CCP is to now protect itself. Having sold stocks to its citizens, it needs to effectively guarantee they can exit the market or keep any losses to a minimum. With a single Government authority  in power, it needs to keep its citizens on a money making curve, and feeling secure. Quite how it does this – which it must – will be interesting to observe. Meanwhile, those commentators who in previous years have suggested that the Chinese Government have ceased being communists and are now capitalists may find that as always, there is a gulf between the two idealogies. Attempting to run stock markets on the basis, in the words of Deng Xiaoping, that “to get rich is glorious” may now be a Genie the CCP in hindsight may have preferred to keep under wraps. How a solution will be found remains the most enigmatic question of the year to come.

Meanwhile, China sentiment should be based on the services industry – now accounting for over half of GDP – and the rise of Chinese consumerism. When the CCP suggested they would reform the economy, they meant just that. Global manufacturing capacity is moving to Vietnam and India and it is hardly a surprise that China’s own manufacturing sector is shrinking as a result.

It is the services industry, not manufacturing that is now beginning to dominate, which is both in line with reforms and a message to those who follow the Shanghai and Shenzhen bourses – look at the services sector, not the SOEs for future growth.

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