It should not be forgotten that the major difference between the world’s second largest economy and the others is that China is still a communist, single party state. Consequently, the aims and constraints within the system are different to those in the truly “free market”. However, the rest of the external investment world treats China as if it was a fully capitalist, market orientated nation.
For the second time this week, trading in the Shanghai Composite Index (SCI) has been suspended for the day – this time after only 29 minutes of trading – since loses hit the 7% of market value trigger. The “circuit breaker” was designed to avoid panic selling and give investors time for more considered moves, but in a climate where the market is clearly over-valued and heading only one way, it just delays selling, hence the second “outage” in a week. A year ago, the SCI stood at 3372, rising to a peak of 5177 in early June – a hell of a rise in anybody’s view – before the summer collapse which took it back to 2960 by late August, resetting to the start of the year. By the end of last year, the index had regained ground to peak at 3680 just before Christmas. The current whopping slide has taken the index back to 3120 or so. It stood at 1788 at its lowest point following the worst of the global financial crisis in October 2008.
A historical overview would suggest that the near doubling of the index’s value in 2015 was a bubble and that its bursting just restored the status quo ante. This bubble inflated against a backdrop of slowing Chinese economic activity and weak global demand, of course, so the underlying economic reasons for such a steep rise were never there in the first place.
The Chinese have acted to devalue the Yuan somewhat, probably in a bid to bolster Chinese exports by making them more competitive in global markets. This is the action of a command economy and not a free-market one which just serves to remind people that the People’s Republic of China remains a communist state that believes in an interventionist economic policy; the Chinese government has never claimed otherwise, of course.