The End of Chinese Exceptionalism

The Chinese stock markets continue to slide. As many as forty percent of stocks are not trading. Many stocks fall ten percent as soon as the market opens and then are closed to trading for the day. More than thirty percent of the value on Chinese exchanges has evaporated in the last month. China’s market crash means more than investors losing money. It means the end of Chinese exceptionalism. The Washington Post reports the story.

What had been hailed as a bull market that would embody China’s dream of national rejuvenation has turned into a burst bubble, and fevered government efforts to arrest a month-long slide in stock prices proved fruitless Wednesday.

For decades, enthusiasts have argued that China was the exception to the rule: that its far-sighted leaders could avoid the debt trap that every other so-called miracle economy had fallen into since the Second World War. That idea could be the biggest casualty of the crash, both at home and abroad.

Managed capitalism was supposed to be a better route to success than a market driven economy. But, the huge hidden debt burden in China is similar to what happened in Japan in the late 1980s when an economy seemingly set to take over the world collapsed into more than two decades of deflation. Will the end of Chinese exceptionalism lead to a market driven economy or a retrenchment into an old style Communist dictatorship? And what does all of this mean for the Western investor?

Is It Time to Invest Yet?

The time honored blood in the streets investing scenario would have it that the best time to invest is when things are at their worst. There certainly are good Chinese companies available as American Depository Receipts in the US market. But have these stocks hit bottom yet? Reuters reports that Chinese ADRs are still falling.

The weeks-long tumble in the Chinese stock market is continuing to spill over into China-focused exchange traded funds and ADRs in the United States, boosting demand for hedging in the U.S. options market.

Despite Beijing’s best efforts, China’s main stock indexes have lost about a third of their value since mid-June, and Chinese shares trading in the United States are feeling the pinch.

The drop in the Chinese market has led to some 20 Chinese ADRs falling 20 percent or more over the last month.

Alibaba whose IPO opened at $90 and which peaked at nearly $120 last year has closed at its all-time low of $77.98. The end of Chinese exceptionalism will not necessarily damage all stocks. The trick will be to sort out which to buy at the bottom and which to avoid at all costs. That time has apparently not yet come.

Is There More of a Downside?

The end of perceived Chinese exceptionalism will likely cause investors to think twice before investing in China. The slowing Chinese economy may slow more as equity evaporates. The further downside risk is of social unrest and political upheaval. The current government has created enemies in cracking down on corruption. There are likely those who are sharpening knives behind the backs of the current leaders. The Wall Street Journal calls our attention to the Chinese government’s response to the market meltdown and says it reveals deep insecurity.

Far more than simply a market crisis, the turmoil on the Shanghai Stock Exchange is viewed by China’s leadership as a potential security threat to the regime.

That helps explain the barrage of measures unleashed by financial authorities to counter a sudden market downturn that threatened to shake public confidence in the government.

In that sense, the unprecedented rescue moves, including a multibillion-dollar fund set up by Chinese brokerages at the government’s behest to buy blue chips, is a preview of what’s to come following the passage last week of a national-security law that massively expands the definition of threats to the state to cover almost every aspect of domestic life, including “financial risk,” as well as international affairs. The law explicitly states that economic security is the foundation of national security.

Stay tuned for social and political events on the Chinese mainland as the end of Chinese exceptionalism unfolds.

The End of Chinese Exceptionalism PPT

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