China Syndrome sends world stock markets off the cliff

Heavy-handed and clumsy Chi-com currency and stock exchange tactics hit stocks, currencies with (perhaps unintended) shock and awe.

Cliff diving in Bruce Peninsula National Park on Lake Huron, Ontario, Canada. (Flickr, CC 2.0. Photo credit: Derek Tsang)

WASHINGTON, Jan. 7, 2016 – If you’re a trader or investor, it would be nice to say “what a difference a day makes” this chilly Washington Thursday. But alas, no can do. U.S. stocks opened with a spectacular cliff dive at the 9:30 a.m. Wall Street bell, courtesy, once again, of those “too smart to fail” Chi-coms screwing up their own markets and currency once again.

It’s almost impossible to describe to the layman what’s going on over there in the People’s Paradise, once praised for its highly successful version of capitalism by government fiat. Indeed, during and after our own 2007-2010 stateside financial debacle, the Chinese government looked like their economic geniuses—many trained in the U.S.—had figured out a new way to get the capitalist business and banking systems to work much better than we ever had. Many feared they were leaving us in the dust.

But no more.

In typical Communist fashion, no sooner had the Chinese, along with their central bank, the People’s Bank of China (PBOC), browbeaten the International Monetary Fund (IMF) to approve the yuan as a “normal,” accepted world currency, than they proceeded to put plan X into effect; namely the sudden, unexpected and rapid devaluation of their currency. This was something the U.S. had been trying to get them to do in the darker days of the Great Recession. But no way. The Chinese figured they had us on the ropes and they’d do damn well what they pleased.

Well, it seems as if this tactic, along with buying up all the copper, coal and iron in the world was all-too-aggressive, another quality Communist governments excel in. Along with this, the banking system lent out money like there was no tomorrow. Then, the Chinese opened trading on their own exchanges to “the people” who promptly treated it as a game, transporting the Chinese stock market into a massive bubble within months—which promptly deflated within weeks.

That, plus overblown real-estate, shady IPOs, and God knows what else, and it looks like the Chinese economic miracle was just like U.S. liar-loans for housing in the mid-2000s: a mirage that was bound to vanish abruptly.

In an excellent article Thursday morning, ZeroHedge got to the bottom of it all, at least on the monetary front, and we quote it at length here as it explains China’s manipulation of currency reserves as a way to solve their big problem:

“Standard central-bank intervention to support a currency generally involves selling dollars and buying the home [currency]. In this case, China’s large state banks borrowed dollars in the swap market, sold the U.S. currency in the cash spot market and used forward contracts with the central bank to hedge those positions.

“‘If you can intervene without actually diminishing your reserves, it’s somehow viewed as better,’ said Steven Englander, global head of Group-of-10 foreign exchange-strategy in New York at Citigroup Inc. Such central-bank activity ‘may not look quite as dramatic as the sale of reserves, and they may prefer that optically,’ he said.

“Since this form of FX [foreign exchange] intervention does not impact cash reserves and is not reflected in a change of underlying spot securities, China could intervene for an extended period and not show it, which is precisely what happened in October and November [2015].

“The problem is that this only works for a limited period of time, and only if the manipulation with synthetic instruments [forward futures contracts] works. In this case it failed miserably as the latest collapse in the Chinese currency has demonstrated. It also means that sooner rather than later, the PBOC would be forced to revert to traditional, cash-based intervention.

“And then came December.

“As the PBOC revealed overnight, China’s foreign-exchange reserves plunged much more than forecast in December, capping the first-ever annual decline (of $513 billion) as authorities sought to prop up a weakening yuan. More importantly, the $108 billion decline from $3.438 trillion to $3.330 trillion — far greater than the $20 billion estimated — was the largest on record, and shows that while on the surface the Yuan was stable, behind the scenes the PBOC was furiously dumping securities to prevent an all out currency rout as outflows hit a record.”

China Forex (FX or Foreign Exchange) reserves as of December 2015. (Chart via ZeroHedge, based on PBOC data)
China Forex (FX or Foreign Exchange) reserves as of December 2015. (Chart via ZeroHedge, based on PBOC data)

In other words, along with U.S. dollars, the PBOC has been dumping whatever securities it was holding as a security hedge with abandon, seriously disrupting worldwide stock and bond markets. Hence the massive spillover affect that’s been hitting markets here and in Europe as well. Add in the Saudi-Iran thing and the (maybe) North Korean H-bomb—clearly timed to scare the U.S. and extort more money from the American taxpayer—and you have the beginning of a horrific new year of trading no matter what it is you’re investing in.

That’s enough for now. No trading tips for today, other than getting out of the way of what’s going on and NOT panic selling everything you own.

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Terry Ponick
Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17