The world's financial markets had a terrible Monday. The debt crisis in Greece (population: 11 million) has been dominating the headlines and the press's attention, while serious deterioration in China (population: 1.36 billion) is getting short shrift.
It isn't just that the mainland Chinese stock market has broken the bear-market decline threshold of 20 percent in less than three weeks, dropping 21.5 percent from its June 12 peak. Its underlying economy, to the extent that such things can be ascertained in an information-controlled and news-manipulated society, appears to be in serious trouble. Associated Press reporter Ken Sweet, in a Friday Q&A writeup, emulated the worst tendencies of politicians. He posed a question about China's economy, "answered" it with a complete dodge, and pretended that its economy hasn't started slowing yet (bolds are mine throughout this post):
... ISN'T CHINA THE SECOND-LARGEST ECONOMY ON EARTH? SHOULD I BE WORRIED?
China's economy is huge, but the country's stock market is largely isolated. Outside investors have only been able to access the Chinese stock market since October, and that required purchasing stock in Hong Kong. To buy directly in the Chinese stock market required a specialized license.
The lack of access has made it difficult for investors, including U.S. fund managers, to get exposure to the Chinese stock market.
For example MSCI, a company which publishes stock indexes, made a decision earlier this month not to include Chinese "A" shares, or stocks traded on the mainland, in its global indexes. MSCI largely cited the lack of access for foreign investors to China's market as the reason to continue to keep China out of its indexes.
There are funds that have exposure to Chinese stocks, and they have not fared well.
U.S.-based exchange-traded funds, the iShares FTSE/Xinhua China 25 index and the iShares MSCI China Index Fund, lost 2 percent (on Monday — Ed.). A fund that owns A-shares, which used to be restricted to the domestic market, fared worse: The Deutsche X-Trackers Harvest CSI 300 China A-Shares plunged 8 percent.
... IS THERE A POINT WHERE I SHOULD GET WORRIED?
The Chinese stock market is down 19 percent since hitting a peak two weeks ago. (This was true after Friday; it dropped another 3 percent on Monday. — Ed.) If it goes below 20 percent, it would be entering what's known as a bear market. Going into a bear market is not necessarily a sign of worry, but it could be a sign that more swings are likely to come before things get better.
The biggest concern is whether the drop in China's stock market will cause the country's economy to slow.
Answering his own question about China's economy, all Sweet wrote was that it's "huge" (thanks pal, as if we didn't know). Every other element of Sweet's non-answer was about the Chinese stock market, and amounted to: "Don't worry, not a lot of U.S. money is tied up in it" — as if that's the only relevant measure of U.S. entanglement.
As seen above, Sweet would only acknowledge that concerns about China's economy slowing down are in the future. That simply isn't so. The slowdown has been in progress for some time.
At USA Today this morning, Adam Shell wrote of China's slowdown twice in the present tense — and it didn't just happen over the weekend:
Market mauling: Chinese stocks in bear market
The once red-hot Chinese stock market is now icy cold, as another big selloff Monday tipped the mainland China’s main stock index officially into bear-market territory.
... The recent declines have been driven by fears of overvaluation, a slowing Chinese economy and concerns that Chinese authorities will crack down on buying stocks with borrowed cash to tame euphoria.
... The Chinese stock market has been levitating with the help of stimulus policies from the nation’s central bank and central government. Investors, however, are unsure if policymakers, including China’s central bank, will once again announce fresh stimulus measures to prop up the slowing economy and tanking stock market.
Shell wrote what he did because, to borrow and turn around a statement often used at U.S. presidential State of the Union addresses, the state of China's economy is not strong — and the government's aforementioned Keynesian responses aren't helping matters.
Then there's this, as carried at Zero Hedge:
According to Paul Chan, chief investment officer for Asia ex-Japan at Invesco in Hong Kong, "China’s fourth interest-rate cut since November failed to stabilize the stock market as it was seen as a stopgap measure to stem a slide in share prices rather than an effort to revive the economy." He added that "It seems like policy makers are more worried about the stock market than about the real economy. The economy is slowing down and they are so much behind the curve in terms of easing. But as the stock market corrected, they jumped in, putting in all the policies. It gives people a sense of panic."
A situation which requires "an effort to revive the economy" isn't about future "slowdown" worries. It's about the here and now. Unfortunately, Chinese authorities may have built an export economy, but they've also imported a heavy-duty, central bank-controlled Keynesian mindset. It's not having its desired effect, and, as is the unfortunate case here in the U.S., they seem congenitally unable to concieve of a more viable alternative like allowing freer markets demanding less draconian and more predictable regulation (at least in the case of the U.S., add onerous tax burdens to the mix).
In case Ken Sweet needs more proof that China's slowdown — to be clear, not a contraction, but a significant reduction in economic growth to a still-positive level — has been going on for some time:
- Quartz.com, April 19 — "Why China’s economy is slowing and what it means for everything"
- The Economist, May 11 — "Why China's Economy Is Slowing"
- Bloomberg, April 14 — "China’s Economy Slows to Weakest Since 2009 as Output Wanes"
I'm thinking that Ken Sweet dodged his own question because he and the AP are more interested in keeping low-information voters and the broadcast networks (I'm sort of repeating myself) unaware of hpw bad things are in the world's most populous nation. That's because the U.S. economy, despite their sunnyside-up reporting and QE-driven stock market masking the problems, is also not in the best of shape.
Cross-posted at BizzyBlog.com.
