There is always a danger, when writing about stock exchanges, that events will overwhelm whatever tentative conclusions an author draws. Start an article with a point to make, and find that by the time the article is finished, the indexes have dropped (or risen) hundreds of points. Furthermore, even quite large movements often lack clear reasons or underlying economic data that might explain them. In that case, whatever subtle interpretations wild swings in the markets give rise to might evaporate with another large movement in the opposite direction at next opening.
Such has been the case in the last week. After a long and relentless rise since the beginning of last year–rather against expectations–the beginning of this year saw the Dow Jones make like the recent Falcon Heavy as it powered through uncharted technical limits. Finally, just as many had always believed likely, even if such predictions gave no precise timing, the market turned volatile after all. The largest points drop in the history of the Dow Jones sounds more dramatic than a moderately heavy percentage loss, but in any case, the mood has shifted from feverish anticipation to uncertainty. The fundamentals appear sound, but recent rises were clearly euphoric, frothy, and doomed to correct (especially in retrospect).
When America Sneezes…
It used to be said that when America sneezes, the rest of the world catches a cold, so central was the U.S. to the world economy. Yet for years talk has been of decoupling; of Asia, or even just China, being the new global growth engine, fired by large export earnings and ever-rising GDP. Indeed, since the 2008 global financial crisis, there has been talk of little else. China floated the world economy on an ocean of stimulus and now expects gratitude as their strategic aspirations–in the form of the Belt and Road Initiative–take centre stage.
China’s experience of stock exchanges, however, is not yet a happy one. While there has been some public appetite for share ownership, when share prices collapsed by 30% in June 2015 after several years of stunning growth the realization dawned that stock exchanges in China are better understood as simulations rather than actual markets in corporate ownership. This point is underscored by the fact that both the largest stocks traded and the largest investors are state owned. A few big aftershocks and periods of uncertainty followed, and today the Shanghai share index trades at just a little over 60% of its June 2015 peak.
Behind all these movements, as one might expect in China, sits the indispensable hand of state intervention. Bans on institutional investors from selling shares, instructions to SOEs to purchase shares and an almost instinctive fear of simply letting the market find its level infiltrates the entire practice of share ownership in China. Beyond this, there is the simple fact that share ownership in China implies essentially none of the corporate control elements that it might in the U.S., meaning that the behaviour of the stock market should–quite rightly–be viewed with deep skepticism. Yet even so, when the U.S. stock market takes a dive, Shanghai follows.
Just because it looks like a duck…
Last week’s tremors in Wall Street seem to have stabilized for now, but the immediate impact they had in China was both obvious and concerning. The exchange is still closed off to global capital markets, and the state still–perhaps more than ever–dominates valuations. Yet even so, the Dow shakes and Shanghai echoes. Almost as if U.S. growth prospects and profitability somehow matter to Chinese investors. Or perhaps as if the whole world is just one gigantic, poised domino cascade, breathlessly anticipating the first toppling tile.
Alternatively, China may indeed be decoupling, albeit slowly, meaning the stock market is not the place to look for evidence of such. More likely though, is simply that the U.S. is still–and once again, perhaps more than ever–at the centre of the world’s economy. That when there is a correction in Wall Street, that this expands like a tremor around the world, adjusting expectations as it goes. Certainly the messages received by the U.S. Embassy in Beijing from Chinese investors–blaming the U.S. for losses incurred on stock exchanges around the world–indicate that while they may have the wrong idea about stock markets in general, they do understand which way the wind blows.