China’s financial markets are highly manipulated, it almost goes without saying. The RMB rate is set daily in Beijing, and is only indirectly related to market sentiment. The stock market, ditto. The sudden fall over the past week was perhaps sparked by fears of the impact from US-China trade issues, but that was not the basic cause. The controls on withdrawing funds from the market and on selling shares are growing, which must reflect both a desire among investors to divest and a fear of the party-state of a sudden rush for the exits. Surely buyers are concerned about getting stuck – being unable to sell in a falling market is the ultimate financial nightmare.
Our guess is that in such circumstances, the only people putting money into the market for now are going to be players attached to or influenced by the National Team. It’s too risky otherwise. And how does this play into the great CDR wave of salvation? Xiaomi’s CDR share launch has already been postponed.
At the heart of the USA-China dispute, meanwhile, is the question of who needs who more – China or the West. This is more than just a China-US disconnect. Peter Navarro, the Trumpist trade guy, published an article in the Wall Street Journal which made the case strongly that they need us more than we we need them. Given the lack of transparency on the system, it’s difficult to know just how much that is the case. But our view has always been that China needs the West more, and the stock market reaction to a more drastic turn in trade war rhetoric this week was much stronger in China than on Wall Street. Read into that what you will.
But how to use all this gut feel in the short term? It could be that this is a good time to buy – everyone is bearish, and the National Team will for sure be providing a floor and pushing prices up until sentiment improves. Just a thought and absolutely not a trading recommendation
Have a good weekend.