On July 27 the benchmark Shanghai Composite Index fell by 8.48% just when it appeared that the government’s massive intervention had re-established investor confidence after the market’s 30% drop in June and early July. The worst single-day decline in eight years, more than 1800 stocks in Shanghai and Shenzhen dropped by the 10% daily trading limit established by regulators.
The June drop wiped out $3 trillion of market value (more than 10 times the total GDP of Greece) although the market had more than doubled in the prior six months and investors who had remained in throughout were still ahead of the game.
The Western media was overflowing with analysis of what it all meant for the economy, the government, social stability, and everything in between.
What really stood out for me, however, was the mere fact that individual investors thought they could make money to begin with. And then when they lost it they honestly felt that someone should give it back to them.
People were actually borrowing money to buy stocks that were selling at 100 times earnings. Do the math. How much upside can there be?
The Chinese are notorious gamblers, in part because of their inductive, yin-yang worldview. They truly believe in intangibles like luck and good fortune.
And it’s clear now that they view the stock market as simply another big casino, although the government had been rather encouraging during the run up. (The more negative Sino watchers speculated that the government was trying to allow large companies to unload some of their massive debt burden.)
My Chinese wife plays in the stock market with a very small sum of money. And I think she is very typical of the individual stock investors who got slaughtered in this downturn.
She knows nothing about accounting or finances. She can’t read a P&L or a balance sheet – and has no interest in learning how. She has never once looked at the fundamentals of a stock she has invested in.
So, how does she decide what to buy? Social media. She has a group of like-minded people linked together on WeChat (The Chinese equivalent of Twitter.) and they trade rumors about specific stocks all day long. Trading stocks, for them, is a form of entertainment.
Another young professional woman interviewed by a reporter after the precipitous drop admitted that she had started investing in the stock market simply because whenever she went out to dinner with friends that was what everyone talked about. She didn’t want to be left out of the conversation but admitted she had no real idea how the markets worked.
And forget day-trading. These are hour traders. When I told my wife that it was not unusual for investors in other parts of the world to hold a stock for several years she honestly thought I was joking.
In fact, not that many Chinese companies measure their lives in years. There are exceptions, of course, but many small Chinese companies are essentially closing and re-opening in a different form continuously. As a supplier, in fact, it’s sometimes difficult to know whom you are actually selling to.
During the height of the downturn it was widely noted that virtually half of the publicly-traded companies had halted trading in their stock. Really? If you don’t like the price your stock is selling at you can just halt all trading? I’ll bet there is any number of American companies that would have loved to have that option in 2008.
What I’m told, however, is that you can’t just halt trading because you don’t like the price of your stock. You can only halt trading if you are about to undertake some fundamental restructuring, such as a major acquisition, which would materially redefine your financial profile.
That’s an awful lot of restructuring all at one time and it’s doubtful regulators on Wall Street would have bought such a widely used storyline. Most apparently had second thoughts, however, as most of the large public stocks have reopened trading again now that it’s clear that the government will continue its unprecedented support, even providing a target floor (4500) for the Shanghai Composite Index.
And what about the poor folks who lost all that money?
Thankfully, equity investments still represent less than 10% of the assets of the average Chinese household and the market is still above where it was a year ago. Most, I suspect, can weather the storm.
The real question on everyone’s mind is what impact the collapse of the market from its fairytale highs will have on the real economy. Most Western economists I’ve seen interviewed believe that the equity markets exist largely in isolation and the impact on the real economy will be minimal.
Having conducted business here for 8 years, however, I’m not convinced anyone really knows what the real economy is, much less how it’s doing. While the gigantic State-Owned-Enterprises (SOE’s) get all of the press, much of the economy is in the hands of private and semi-private companies who have no incentive to tell anyone how they’re really doing.
And then, of course, there is the cash economy, which is entirely under the radar of GDP measurers and watchers. I have no idea what percent of the economy this represents but I’m confident it is not immaterial.
Many Western analysts have noted that the stock market will impact the real economy if the Chinese people lose confidence in the government’s ability to control the market and manage the economy.
But I have a different take. The Chinese people know that the government has the power and the ability to control the market and the economy. Of that there is no doubt in anyone’s mind. No one is losing confidence in this government, as much as snarly Western political analysts would like that to be the case.
I go back to the basics. The Chinese have an inductive, holistic worldview. Intangibles like luck and misfortune carry far more weight here than in the deductively grounded West. That is, I believe, why China enjoys one of the highest savings rates in the world. They believe in the rainy day.
And why they spend and invest with intuition more than analysis. Remember that according to The Daodejing, one of the earliest and most influential Daoist texts, reality, or “the Way”, is far too complex for humans to ever grasp. The Daoist reality is not a world of constants, but a world of constant change; a world defined not so much by the Periodic Table as the continuous interplay of opposing forces (yin and yang).
Confidence, or the lack thereof, will ultimately determine the impact of this market decline on the real economy. It will not, however, be a function of the country’s confidence in the power or ability of the government. It will be broader than that. It will be a function of their confidence in the balance of forces carried by the winds that constantly redefine reality.
My intuition? Blue sky on the distant horizon but a lot of choppy water between here and there. That’s just my inkling, though. I have no algorithms or econometric models to back it up.
I think we can all agree, however, that Confucius was right: “Wherever you go, there you are.” The future will indeed unfold. And then we’ll know.
Copyright © 2015 Glassmaker in China
Notice: The views expressed in this post are strictly those of the writer acting in a personal capacity. They are not in any way endorsed or sanctioned by his employer or any other individual with which he may be personally or professionally affiliated.