China suspended its circuit breakers programme this week, rather embarrassingly only a short time after it was implemented. It became clear very quickly the circuit breakers only fanned the flames of panic. Yesterday the market in China closed a little after 15 minutes post opening, which gives an indication of the panicked rush for the exits. Understandably, no one wants to be the last out.
The valuation of the Shanghai Shenzhen CSI 300 Index is close to 13x Price Earnings which isn’t unduly expensive. The panic created by clumsy government intervention has given the impression of something far worse than bottom up reality. There are economists reporting that domestic quality of growth is now materialising, replacing perhaps the more visible quantity of growth. Until this is reinforced and recognised, the market is like to continue suffering from bouts of excessive volatility.
When we look at the one year performance of the Shanghai Shenzhen CSI 300 index over the past 12 months the ‘boom and bust’ is clear, but has that now come out in the wash? The market performance is now in line with the S&P and the MSCI World over the same period.
The weakness seen in the CNY/USD exchange rate is not surprising. Not least because most other economies have already carried out their debasement and then some over the past 5 years. What’s Chinese for ‘even stevens’?
Why is it when China debases it is perceived to be negative and manipulating, yet western governments carry out the same exercise and it’s quite understandable and for a good cause? However, what is perhaps a little contradictory observation to note, is that reliance on exports for China is becoming less and indeed the economy harbours ambitions to move towards consumption led practices, so in fact, China doesn’t need to aggressively pursue a weaker currency at this junction.
However, the biggest headache caused by this debasement, is the wide reaching deflationary impact it has. This coupled with a collapse in resources has meant western economies are having to continue with (or not withdraw from) QE programmes and super loose policy for far longer than they anticipated, to try and mitigate the deflationary forces.
When does it all end? What does this mean for Asian economies wishing to compete with China for trade? What does it mean for Japan that has witnessed the Yen strengthen significantly? What does it mean for the FED and their rate rise programme? What does it mean for Mark Carney and his letter writing?
The questions at present far outweigh most coherent answers, so 2016 is shaping up to be a rather spectacular year. One of which we doubt we’ve seen the likes of for quite some times