Yes, It’s a Slow Summer in the US But China Is Roiling

Although U.S. financial markets have pulled back recently and some people think they are putting in a major top, the real action this summer is in China.

At first we had a stock market crash of roughly 30 percent, then a surprise devaluation of the currency of 3 percent and bad economic data throughout to accompany the drama.   

August 21st is no exception. Stocks again cratered 4.3 percent Friday, hitting the July 8 rock bottom of 3,507 for the Shanghai Composite Index. This brings the weekly loss to 11.5 percent.

The Shanghai Composite year-to-date (Google Finance)
The Shanghai Composite year-to-date (Google Finance)

After pumping in around $60 billion in yuan liquidity into the banking system and injecting $93 billion U.S. dollars (not yuan) into two banks directly to support the currency and the markets, the People’s Bank of China (PBOC) is at a loss and the market is already crying for more easing.

“PBOC policy may not effectively transmit to real economy, but further cuts [in bank reserve requirements are] needed to counter the liquidity shortage,” writes Zhu Qibing of China Minzu Securities.

Talking about the real economy, to add insult to injury, the Caixin China Manufacturing Purchasing Manager’s Index, a good proxy for manufacturing activity, fell to levels not seen since 2009 in August. The reading of 47.1 signals activity is contracting sharply.

Previously authorities have heavy-handedly defended the 3500 level on the Shanghai Composite, not least by threatening to arrest “malicious short-sellers.” The question is whether such a strategy can work in the long term.

The economy is in free-fall and most of the sellers are disgruntled farmers and housewives who borrowed heavily to purchase shares and are losing faith in the regimes ability to influence prices.

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