Date: July 7, 2015

Greece Occupying Headlines But China is Key

Last Monday, as the stock market was in the process of falling 350 points on news out of Greece, I offered that the much more important news was coming from China where the Bank of China cut interest rates in an attempt to spur on the economy and support the stock market. That was barely a footnote in the media. After an extremely volatile week, reminiscent of 2008, and with the Shanghai Index down almost 25% from its peak, the Chinese government sought further action.


First, they coordinated the 21 largest brokerage firms banding together to create a 120 billion yuan ($19 billion) stabilization fund to buy shares in their stock market. 120 billion yuan seems like a whole lot more than $19 billion, especially when considering that the Shanghai has lost more than two trillion since mid June. Second, the government put a temporary hold on all IPOs in China to keep asset managers from selling stocks to pay for the IPOs.

While their action may seem proactive and timely on the surface, to me this is woefully inadequate, assuming I actually believe government intervention is actually necessary at this juncture, which I don’t. The free market is correcting the excesses built up in the Chinese stock market and economy. As long as the Chinese banks remain solvent and on stable financial footing, their market will get through this. My sense is that the Chinese government isn’t in the patience game and will shore up the banks much, much quicker than what was seen in the U.S. in 2008.

This is China’s 2008 where the problems emanate from their shores and not abroad. Where our government had no money in 2008 to take proactive measures, the Chinese are sitting on several trillions in reserve and can freely inject capital into the financial system and more specifically, their banks.

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Paul Schatz, President, Heritage Capital