Alan Rohrbach @MacroMeister
The Chinese stock market’s substantial decline is indeed a correction. The reason it has been so aggressive is the overall extent of the rally since last summer, and especially the upside acceleration since March of this year.
As Alan Greenspan once aptly noted regarding the overly bullish activity of the U.S. stock market, it had “slipped its moorings.” The metaphorical ‘moorings’ in that case as well as this one are earnings and price/earnings ratios. There was little more than ‘stock market speculation fever’ driving the Chinese equities rally since mid-March.
The Chinese authorities have done both a mediocre and excellent job of managing market perceptions. Earlier this year they were overtly encouraging stock market ‘investment’ that created an irrationally bullish phase. They even pursued some policies that fostered the speculative psychology.
However, since the selloff became more pronounced into late June, they have done a credible job of buffering what was becoming an equally irrational selloff which threatened to become a crash. There are always pitfalls in direct government intervention. Yet given the different mechanisms and psychology of their markets, official actions seem reasonably enlightened. While nobody can know whether the Chinese equities are now fairly valued, braking the downside momentum was a necessary first step.
We cannot say whether Chinese officials look at charts. Yet in mid-March the Shanghai Composite surged above the 3,400-3,100 area substantial technical congestion from early this year. That area is around quite a few other important technical influences like a current major Fibonacci retracement, and quite a few previous rally peaks of the extended bear trend from 2009 through the middle of last year.
Of course if underlying fundamentals deteriorate, it is possible the Shanghai Composite will break below 3,000 once again. That said, the Chinese authorities stepped in at the right psychological and technical inflection point to turn a one-way implosion into a two-way trading market. That was quite an accomplishment whatever the market does next.
By either luck or design they look quite a bit more clever than many of their critics suggest.
Two more points are worth noting on the potential "crash" leading to a Chinese economic depression. While the market may indeed head lower, the authorities acted timely to prevent an immediate larger sense of loss. Last year’s Shanghai Composite closing price was near the 3,239.36 high of the year. The worst levels seen earlier this month were still over 100 points higher on the year. Any holdings that track with the index and were acquired through mid-March were still in profit at the low of the early July selloff.
And as opposed to their American equivalents, it is doubtful that much of the new Chinese middle class’ net worth got drawn into a "mini-boom" that only lasted 90 days. The bulk of their wealth is in property and in the bank. From everyone I know over there the word is that the stock market is still a ‘hobby’ for most folks, like Mahjong.
Might a weaker economy still restrain consumer activity? Possibly. But not because they got wiped out in the market selloff. For the most part the investing public is also clever that way.
Check out more We Asked Traders slideshows here.