Saturday, June 20, 2015

China Joins the Developed World in Monetary Insanity

China’s stock markets just experienced the worst week since 2008. The Shanghai Composite and Shenzhen Composite dropped 13.3% and 12.7%, respectively, over the week that ended June 19.

Over the last two weeks, $9.1 billion has been pulled out of Chinese stock funds, despite the Chinese authorities approving about 50 initial public offerings per month, double the rate of previous months. The higher valuations are driven by the People’s Bank of China cutting interest rates three times and reserve requirements twice since November. In a recent Wall Street Journal article, the root cause of China’s economic woes were hinted at, but not intentionally:
“Morgan Stanley’s Mr. Garner said that despite the current policy-easing cycle that began in November, China’s economy is worse off compared with where it was in 2009, when massive stimulus efforts led the economy to bounce back strongly.”
Stimulus caused the current economic issues; it did not resolve the economic issues of the past. Without irony, the author also made this statement:
“Some analysts now think Beijing is more likely to step in with further stimulus, helping prop up the markets.”
Did monetary stimulus not work? Try more monetary stimulus.