The Chinese Stock Rout Goes On, But Western Markets Rebound… For Now

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Stock markets around the world have rebounded after Monday’s dramatic falls, even so pension and investments funds have been severely depleted even after the bounce back.

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In China, though, where it all started, the market has continued to fall, down another 7.6%. When the Shanghai Market last “corrected,” Beijing stepped in with a $400 billion fund to buy stocks, ordered state-owned companies to buy shares, banned large shareholders from selling and even launched a criminal investigations into short sellers in a desperate effort to prop up the market.

Chinese Stocks Still Falling

Clearly, although that bought a temporary calm it has not lasted and the market went into free fall again this week. Tellingly, Beijing has not stepped in this time, acknowledging that even China does not have the funds to turn global equity markets. Li Jiange, vice chairman of state-owned investment company Central Huijin is quoted by the Washington Post as saying “The trade volume of the market can reach 2 trillion yuan ($300 billion) a day, which means if it collapsed no one could save it,” adding “The issues of the market should be handled by the market itself.”

US dollar vs. RMB

Beijing’s way out involves producing in yuan and selling in dollars.

This time, the Peoples Bank of China have simply cut interest rates, for the fifth time in nine months, by a quarter percent to 4.6%. It also cut its one year deposit rate to 1.75% in a vain attempt to bolster the economy, and reduced banks reserve requirements in another attempt to get them to lend more.

Further to Fall

The rout in shares, though, is not just fear the economy is slowing, it is a growing realization that the market was deeply in bubble territory and the game was up. After rising 140% it is still even after the massive falls some 35% higher than it was a year ago and many doubt the bottom has been reached.

Beijing is putting a brave face on it, trying to show calm and, as usual, blaming foreigners for the falls. But the reality is many millions of retail investors have been burned. Some very badly. With GDP growth widely believed to be lower than the official government number of 7% it is hard to see how domestic consumption can pick up as households lick their wounds.

What This Means for Metals Buyers

The pressure will be on Beijing to do all it can to support export industries as a source of some growth, even though it runs counter to the long-term strategy of rebalancing the economy toward domestic consumption. As with the move earlier this month to weaken the currency, Beijing has shown it is willing to bend its own rules as needs dictate and losing face over allowing the economy to slow down too much is a good enough need.

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Reining back excess exports of steel, aluminum and other metals may, therefore, be too big an ask in Beijing’s opinion, and the flow of such metals could continue unabated for some time.

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