What's your take or analysis regarding China's economy today and the recent 3% stock market drop?

Question

Just wanna know, I want some good insight. Preferably from an economist or someone related to economy. :P Just curious.

Answer 1

China has so many issues and their apparent global economic hegemony is by no means a given.

Their banking is a mess. Prolly their number one problem. Virtually every bank in China is state owned and insolvent (yikes!). They are saddled with bad loans (ala Japan 1980s) and corruption. By corruption, I mean outright theft by offices, "loans" to family and friends regardless of risk and on and on and on. These bad loans are SOP and their non-payment forces them into insolvency.

SOEs. State Owned Enterprises. These companies (like Lenovo) make revenues for their owners (the political elite and well connected), provide jobs for the masses and pay for public works.

Except they don't work. I challenge anyone to find one that makes a profit. Lenovo? Ha, they can't even win their own domestic market...after buying IBM nonetheless. Haier? Never heard of them? Neither has most Chinese...doh! They simply lose money. So the SOE goes to the bank and gets a loan. That they cant pay back...this is where all those bad loans come from. The powerful SOEs (backed by the gov't) simply squash legitimate private enterprise (which is patently capitalist...oh you get the idea now).

The way to fix this is with laws. Except those laws which would alleviate the banking issue also diminish Communist power. And what are the chances the ruling elite vote to reduce their power and hence their wealth. Yup...zero.

And this is but one facet of the banking woes. Don't get me started on AMCs or the sad attempt at consumer loans (a comical effort which any economist could have told you would backfire...it did by the way).

Lets not get started on the lack of property rights/law. As in above, any law establishing such is a refutation of Communism which reduces central authority. No way they vote themselves out of power.

And on and on and on.

China is not guaranteed to by a global anything. In fact, our company operates textile factories there and we are thinking of relocating them to Indonesia. Why? Labor wages are rising (supply and demand) and the workers demand more benefits (better housing, better food, shorter shifts...). The way to fix that is with...laws. Oh, you get the idea by now.

Answer 2

The previous answer provided a good snapshot of some of the issues facing China but those issues have been around for some time, so why all of a sudden a selloff?

If you remember back to 1999 and 2000 during the dot-com boom, our economy was getting a little heated, Greenspan made a speech and used the words "Irrational exuberance" and the market took a dive. Also during that period, the Fed raised rates a number of times and every time they did the market dropped temporarily, worried that Greenspan was going to put the brakes on the economy.

China is trying to not let growth get out of hand and they've sent a hawkish message indicating that them might tighten things a little. There is an equivalence between the Fed rate hikes in 99-00 and China trying to manage growth. Investors got nervous that the party might be slowing and took profits. As the market came down across the board, more selling was induced.

That's my take on what happened.

Answer 3

The market has had quite a big run. I think that is why investors there got a bit nervous. Here is a portfolio of my favorite Chinese companies. I currently own Bodisen Biotech, BBC:

http://www.top10traders.com/ViewPortfolio.aspx?userID=7

http://www.top10traders.com/ViewPost.aspx?postID=266

These links are from http://www.top10traders.com - this is a free site that lets you develop your trading skills, and see how you compare against other investors.

Hope this helps.

Answer 4

Markets are intercorrelated, true

But don't find some economic logic about it.
The strongest link is psychological.

Fear is stronger than greed, there's no reasoning with fear, that is the main lesson to learn.