Some reports are however darn right silly. For example in this CNBS report titled How China might have given itself a black eye, a reporter would first accuse China of committing the sin of fighting in vain against market forces, then accusing China of not being able to do enough.
Then there are outlets like Wall Street Journal pronouncing China is doomed to fail, and then a few days later pronouncing everything is fine. There are of course also those who swear that they had foreseen the crash all along, for umpteenth obvious reasons.
Here is my take.
First, there is in general no clear-cut answer on how much government should intervene to stabilize a market – stock, housing, insurance, currency, whatever – or to fix the economy in general. China is not an isolated island. Within it, there too are debates about how much government should intervene in the market. What is the right or wrong answer depends on the specific details of complicated circumstances, many of which are not – let’s be real – well understood.
Second, whatever the proper balance, it is certainly not true that only Chinese government is unique in getting involved in “stabilizing” markets as it did this past week. The U.S. – through its quantitative easing – and European Union – through their version of it – have done similar things – on a grander scale. The Japanese government have also famously gotten involved in directly purchasing stocks to try to stabilize stock market (and currency) at various times through the last several decades. Governments throughout the world, including that of the U.S., European Union, Japan, Russia, Brazil, and India have all intervened in the currency markets for in recent history.
Third, the fact that Chinese market dropped 30% also per se should not be a cause for fright. In the U.S., market drops happen with surprising frequency and regularity. Here is a table summary of a history of crashes going back to the early 1928. 1
Again, I understand this is for the U.S. market, not China’s market. And there are many differences (but as well as similarities as well) between U.S. and China, but a crash of 30% per se should not spook the long term outlook. Crashes are part of the norm of markets – stocks, futures, real estate, whatever.
Fourth, there are many that are predicting that China’s fall in market will precipitate a fall in its economic growth – i.e. gdp growth. Again, I fail to understand. It is well known that stock market performance and economic performance are, if at all, at best weakly correlated. It is stupid to predict that China’s economy will sputter solely on the ground that its stock market crashed this year.
Finally, I don’t have a crystal ball and don’t claim I can predict the future (The world is awash with smart people making dumb predictions of the future, and I don’t intend to join their ranks. 2), but I do know that the kind of predictions and reasoning I see given by people for their sour predictions of China’s future this past week look to be just hot air. Hot air fuming out of their mouth … but smelling very much like the type coming out their other ends…
- See http://www.fool.com/investing/general/2013/08/19/what-i-plan-to-do-when-the-market-crashes.aspx ↩
- People fundamentally can’t predict stocks, or sporting events with any consistency, so why should anyone think they can predict a game changing historical event as China’s rise? Conversely, if you really think you can really predict the future, why aren’t you a billionaire now??? ↩