Recently, I have been addicted to a Netflix documentary, called “Making a Murderer”. The story is about a man named Stephen Avery, a Wisconsin guy who keeps getting himself into trouble. After serving 18 years in prison without actually committing the crime and finally exonerated himself due to the new DNA evidence, he got himself into trouble again by suing the local county law enforcement, which in turn planted evidence and got him charged with murder. Through this process, media played a shameful role of aggravating his “bad image” as a “murderer” and finally got him in jail for the rest of his life. Inspired by this story, I couldn’t help but collect the overblown image of China being the “culprit” of the current global market havoc.
Coincidentally, my roommate in the US, who was never really interested or familiar with the realm of finance, asked me what was going on in the China market. I was stuttered at first, just telling him that it is a temporary selldown and everything is going to be ok. I am literally shocked, however, by how mainstream financial news “consumed” China to be the trigger of a selloff in the global market. While market psychology continues to play a pivotal role here, who is making a murderer out of China? Is China really the chief culprit for the global market selloff?
Let’s take ourselves back in 2015 for a little bit – despite that China suffered two major selloffs in the stock market, triggering market panic and uncertainty, the market was actually one of the best performing equity indices globally. Is this a subject of administrative control? Maybe. The State Fund has obviously intervened in the market and have pledged not to exit in the short term horizon. But was this uncommon in the west? Come on. BoJ, the Japanese central bank openly purchased ETFs of its own indices, without any constitutional limits. This is beyond outrageous for disciplined economists, but seem perfectly natural for the folks at the mainstream financial media, calling it “mild easing”. So somehow the National Team (国家队)’s involvement in the Chinese stock market became a crime and a way to intervene in the market? As for the notorious QEs, that becomes the righteous way of helping people out of the crisis?
Same applies for the RMB – The RMB has appreciated 30% in real terms since 2010. Oh, maybe insane financial critics don’t care what REER (real effective exchange rate) really entails. But at least you should respect nominal exchange rates? In nominal terms, RMB has appreciated 32% against the Japanese yen, 40% against the Aussie dollars, 18% against the Euros and 18% against Putin’s rubles in less than two years, all of which major trading partners of China. So a 6% correction in the RMB against the USD triggers market selloff? What sort of erroneous logic is this? The Japanese yen, manipulated by Mr. Abe since his ascendance, has been a perfect model market currency due to its manipulation, whereas the RMB, setting its fixing due to market reasons, an exemplary failure of central banking?
While people have been critical on China numbers, they have actually bought the PBoC numbers that the Foreign Exchange Reserves has gone down, blaming China for “abusing” it forex reserves. While Mr. Zhou, Governor of the PBoC, might have been inconsistent somewhat in his policy making career, he has been consistently calling for a reduction in China’s forex reserves, calling it a “burden” and not what China has been longing for. Yet people don’t care, as long as the “norm” has been disrupted – the RMB should be appreciating constantly’ the Forex reserves of China should never go down; China’s GDP is never accurate; China should hold itself responsible for the current market crisis.
Unfortunately, people overlook the importance of the Fed rate hike; people ignore the ongoing energy sector havoc; people forget about how independent some US companies are from China; people smears about the junk bond funds’ collapses. All of this, has been the background “noises” of the current economic backdrop, and we should point fingers to a country that doesn’t share the same value with us. We get this, but we are disappointed. Since when has the US not taken responsibility for global economic governance?
It is what it is – for Chinese policy makers, they should be realizing that they have their back against the wall and there should be no expectation of “luck” or “breathing room” from elsewhere, and thus I suggest the following policy measures:
1.Open up foreign portfolio investment in Chinese stocks and bonds – it has been years of discussion for this to be opened up and the government couldn’t make up its mind due to risk of ownership. There has been existing laws that already limits foreign ownership, while QFII is a perfect mechanism for China in the past, the policy making should think ahead of the current global fund flow dynamics. That’s why QFII’s eventual liberalization – no QFII is necessary for China. Subject to regulations and exchange requirements, foreign buyers should be able to buy Chinese equities freely.
2. Truly enhance coordination between departments – China has been doing this through setting up a secretariat in the State Council. The secretariat should be headed by the Premier, with routine communications and policy making exchanged at this office, especially during this time of extreme stress.
3.Let Zombie companies/banks/financial platforms default – the establishment of a deposit insurance scheme is to enable potential default mechanism of corporate and financial institutions’ failures. While this might be a tough thing to take, it is rather necessary to enforce it through a regulated market exit.
4.Encourage banks to lend for M&As – M&As are necessary for industries that requires consolidation to be efficient. Financing channels have been scarce. While several state-owned banks have been tasting the fruits of it, more policies should be inclined to support it.
5.Reduce obstacles for re-entry of foreign-listed Chinese companies – the process is ongoing but is not enough. It is crucial for a healthy stock market to have truly exceptional companies rather than companies who use “schemes” or “ideas” to conduct fraudulent activities.
While this may not be enough for a market recovery, it will help China’s international image as well as financial markets in the long run. Finally, China do need a voice in the global financial news industry, which I believe will be partially our responsibility to undertake. I hope there is a day when people start to realize how important it is to find the true cause and therapy for a crisis, rather than making fun or news out of it. Financial journalism is about facts, and when stories take place of facts, there stand no true journalism, but remains of fable and tragedies.