Date: January 7, 2016

Water Needs to Find Its Own Level in China

Last summer I included China’s stock market in a few pieces as it cratered lower and lower. Remember, as I explained, while China may be the second largest economy on earth, they are relatively new to the capitalist system. They have, are and will continue to experience “growing pains” as the powers that be seem to believe they know better when it comes to controls in their financial markets.

Over the summer as their market collapsed, the government instituted all kinds of manipulations to prevent further carnage. They tried injecting their own capital into stocks. They halted trading on hundreds of stocks. They eliminated short selling on others. They put circuit breakers in place to close the stock market totally if it fell by 7%.

At that time, I opined that all they were doing was prolonging the inevitable. Water finds its own level. You can’t prevent a selling stampede that’s all lined up. And just as their officials were¬† gearing up for the victory lap, sellers began to overwhelm the Shanghai index in late 2015 which has now spilled over to 2016. Instead of stemming the tide, the 7% circuit¬† breaker has led to pile on selling as investors try to get out as soon as the market opens to avoid getting shut out of selling when it falls 7%.

The first solution is to remove the 7% breaker which was hinted at today and let everyone sell. Rip off the Band-Aid. Be done with it. This may cause a mini-crash, but my sense is that a good buying opportunity will be closer at hand. The August lows are just under 2900 on the Shanghai index and I would be very surprised if they are not breached this month, maybe next week, in some type of waterfall, capitulatory decline.

Without any anecdotal data to back this up, I have operated under the premise that whenever a major stock market is down 50%, it’s time to start buying. Sock some away for retirement. Maybe some for the kids’ college. The Shanghai is close to that level again.

If you would like to be notified by email when a new post is made here, please sign up HERE.


Paul Schatz, President, Heritage Capital