As I wrote in a recent blog, one of the big worries in the US stock market is the fallen price of oil. (Blog 1/16/16) The second worry is China, our trading partner. When that nation hiccups, investors here pay attention.
At the moment the country poses a two-pronged worry. First, many of China’s investors are new to capitalism and tend to speculate rather than study industries. The trend at the moment is to follow market manipulators (Zhuang Jai) and attempt to buy or sell ahead of them. Of course, they can’t and so the market swings, “like a wrecking ball on a pendulum,” to borrow billionaire George Soros’ description. (“China’s Capital Flight,” by Peter Coy, Bloomberg Businessweek, Jan 18-24, 2016, pg. 11) When values drop precipitously, China’s government steps in and freezes trading for a time. Too much government control discourages global investors and money flows out of the market even though the country’s real economy is growing, though less rapidly than in the past. (“How Investors Learn to Dance with Wolves,” Bloomberg Businessweek, Jan 11-17, 2016, pg. 37.)
The second prong is uncertainty. No one knows which way China is going to jump in its slowing ecoomy. Will it continue to embrace capitalism or will its fear of economic fluctuations cause the country to cut off foreign investment as it did in the past? Recently, Chinas’ currency, the yuan, was allowed to float in the International Monetary Fund, a basket of reserve currencies, along with the dollar, pound, euro and yen. To be a player, China had to lower some of its foreign investment barriers. That decision made it easier for money to flow in and out of the country. At the moment, much of its trade surplus is flowing out. How long China will allow its assets to bleed is the question. (“China’s Capital Flight,” by Peter Coy, Bloomberg Business Week, Jan 18-24, pg. 11. )
Uncertainty is the enemy of the stock market. While China may seem far away, it lives in our retirement funds, in 401ks and IRAs. It lives in the American jobs that prosper with China’s growing economy. We exist in a world governed by entanglements, just like the quantum one. A hiccup in China can be heard around the world.