The old maxim of starting a new year the way you want it to continue might not be what observers of the China market would like to hear right now.
The first trading week of the year proved incredibly bumpy, causing jittery reactions around the world, including Taiwan, as Chinese stocks fell about 12 percent.
Beijing’s heavy-handed and muddled efforts to control the markets failed embarrassingly, raising questions about whether “the government itself knows or is capable of implementing the policy, even if there is one,” as DBS bank said yesterday.
A stock market “circuit breaker” that on Monday came into effect following much fanfare was scrapped late on Thursday after the mechanism suspended trading twice in four days and seemed to encourage a sell-off as Chinese shares plunged.
The two-step mechanism appears to have been designed by bureaucrats who have little understanding of the stock market or investor behavior: Investors started selling as fast as possible following the first pause in trading, before the second trigger kicked in to halt trading for the day.
While the China Securities Regulatory Commission’s retraction was yesterday welcomed by market observers, the commission announced more restrictions on the market, imposing a new cap on the amount of stock that major corporate shareholders can sell, despite evidence that its restrictions are proven to be counterproductive.
However, the commission was not the only Chinese institution whose mixed signals roiled the markets. The People’s Bank of China yesterday raised its guidance rate for the yuan for the first time in nine trading days, one day after the currency plunged against the US dollar in its biggest fall in five months.
Yet its guidance is problematic, as the bank has been saying for months that it sees no reason for depreciation, while gradually nudging the currency lower.
The yuan’s fall this week created a sense of deja vu — a repeat of what markets saw last summer — and caused many analysts to worry that it could trigger a wave of competitive devaluation in an already shaky global economy, raising the specter of the Asian financial crisis that began in 2008.
The worry is the yuan’s rapid devaluation is a sign that the Chinese economy is weaker than the government’s official statistics indicate. There is also fear over how much the central bank would let the yuan fall, amid reports that it is under pressure to let it drop by another 10 to 15 percent.
Bad news keeps coming: China’s foreign reserves shrank last year for the first time since 1992, losing US$513 billion largely as a result of the central bank’s efforts to prop up the yuan after August’s devaluation.
Investor George Soros is among those who compared the week’s events with the turmoil in 2008. Soros told an economic forum in Sri Lanka that China faces a “major adjustment problem” and that looking at financial markets, he sees “a serious challenge” ahead.
Cornell University professor Eswar Prasad, a former head of the IMF’s China division, was equally blunt: “We should be worried rather than calmed by the moves that we have seen so far.”
Yet Beijing policymakers and leaders appear incapable of ending their decades-long habit of micromanaging the economy. What China’s markets and economy need are clear rules and their enforcement, and an end to nitpicking and meddling. However, as with many other areas, Beijing only likes to talk about the rule of law and hates to live up to its promises.
As a result, investors are reluctant to trust Beijing’s policymakers, and that is not good for China, or the rest of the world.
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