Turmoil in Chinese Markets

Andamento del mercato - 18/08/2015

The hurricane of changing sentiment and uncertainty surrounding the recent Yuan devaluation in China has escalated into today’s market, with the Shanghai Composite closing -6.15% off the previous day and 27% down in total from June’s high. Most of the problems stem not only from the lack of effectiveness in the easing measures implemented by the People’s Bank of China, but from the distrust now present in the markets regarding the situation in the country. These policies appear to traders as the Chinese government trying to catch sand in a sieve, and stubbornly refusing to acknowledge their ineffectiveness. The volatility present in the equity markets churned to whitecap levels overnight, producing concentrated lows not felt since the beginning of this three-week freefall. Doubt in the Chinese system has given way to complete disbelief, with policymakers enforcing bans on short-selling or any selling at all, and going so far as to censor negative discussion on an instrument even while over half of mainland stocks are trading limit down. The government is rue to believe that the medley of economic bandaging currently applied to the economy will have unforeseen consequences.

By halting the sell side of the buy and sell equation the Chinese have managed to alter the fundamental mechanism that allows for any stock’s price discovery, and thusly ruined the sentiment of potential foreign investors into China. In an environment where there is limitless buying but limited selling, finding equilibrium and achieving liquidity are both extremely difficult. With the sell side hampered, bear witness to the big price crashes of today. Foolish policies flying in the face of a cornerstone market equation puts the responsibility of the market’s overseers into question. Skepticism in traders concerning the Chinese market has by now been completely replaced with a complete loss of confidence, a dire problem that the government must contend with to fix the structural issues present. These events are on par with a Central Bank losing control of a major world economy, and leaves economists concerned that if it can happen in China, it can happen elsewhere.


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