Monday, August 24, 2015

People’s Daily: ‘Black Monday’

Shanghai markets closed on Monday with stocks 8.5% down, prompting Chinese Communist Party’s official organ, The People’s Daily, calling the meltdown “Black Monday.” (Economist, 24 August)

The Chinese downturn hit global markets hard. The Dow opened down more than 1,000 points and after regaining some of the losses closed down 588 points, or 3.6%. The Eurofirst 300 index had its worst day since 2009. And Germany’s DAX has now lost all the gains it made in 2015.

Commodity markets are tumbling. Brent oil closed at $42.69. A broader index of 22 commodities compiled by Bloomberg is at its lowest since 1999.

Chinese market problems began when the country devalued its currency yuan on 11 August. Today’s Chinese meltdown was triggered by disappointing data on Friday, suggesting that China’s industrial activity is slowing sharply, and by the failure of the Chinese government to unveil bold market interventions to prop up its equity market. (Economist, 24 August)

It’s important to note, however, that the Shanghai Composite is still up 43% on its level of a year ago, and China can still intervene aggressively in the market. So there's some light at the end of the tunnel!

Photo credit: ImagineChina/The Economist


Anonymous said...

What do a bunch of communists know about running free market and stocks ? I guess they were doing great when they were using prison labor ,.Now they have to worry about serious political unrest when their competitive advantage in cheap labor is lost .South Korea and Japan look like a more attractive place to invest in near future .

Anonymous said...

The Chinese economy is an export driven economy much like Japan. It helps to keep the currency low to make it appealing to export market. The downside of it is that it hurts imports. Unfortunately unlike Japan who maintain a steady eye on the currency, China’s approach was sudden and took market by surprise. Another factor is that the global economy is slowing down which means that the demand for goods made in China is less. It is interesting to point out that China by volume has the largest reserves of US dollar in the World and that hurts more than the Yuan devaluation itself.

The issue at the moment is that the world current economic growth is largely driven by the emerging economies in Asia and Latin America. So we in the West are also affected by what is happening in emerging markets. Markets have a habit of overreacting to these type of fundamentals. However, they tend to correct themselves thereafter. Case in point the war in Syria and Iraq and the general tension in the Middle East has failed to affect the price of oil as before. To put numbers in in the past 4 months an average portfolio of 100K has lost its value by 17%.

In the short term there are advantages to consumers. The commodity prices will have to stay low and the interest rates affecting borrowers and mortgage payers will not increase. The price of food will stay down. On the other hand wages will not increase either. Assuming that we expect an economic cycle every 10 years and the last one was in 2008, I would not be surprised to see the start of another downturn cycle now. The problem is that unlike the previous cycles the world has not really recovered since 2008 yet!

Anonymous said...

Black monday Regradless of falling oil Prices