Why what happens in Beijing, won’t stay in Beijing

I saw a quote a few days ago that 'What happens in Beijing, won't stay in Beijing'. We should be pretty weathered by now to Chinese market sell-offs, a super volatile oil price, the geopolitical instabilities, and a marked slowdown in global growth. And yet the Dow shed more than 1,000 points in its first week of 2016 trade, both the Dow and the S&P 500 are around 10 percent lower from their recent highs, and a number of European indexes are off 5 percent-10 percent in early January trade.

China publishes a slew of data this week, including December gross domestic product, Chinese lending and trade balance data, and inflation. Some of my guests argue that the data, even if it moves markets initially, won't make a difference as it's already expected to disappoint.

The data are part of the bigger picture over why global investors are suddenly being so nervy and selling pretty much everything except bonds.

An investor observes stock market at a stock exchange hall in Fuyang, Anhui Province of China.
ChinaFotoPress | Getty Images
An investor observes stock market at a stock exchange hall in Fuyang, Anhui Province of China.

Here are some points to ponder:

  • You would do well to remember that China is still the world's second-largest economy. And if an economy of scale faces a hard landing, it resonates around the globe; manufacturing stalls, world trade flows are impacted, investment stalls, capital flows shift paths.
  • What will the Chinese Government be doing tomorrow? It's a communist state, and so are used to controlling everything. But can the government control the markets? If people lose faith in protocols that the state has put in place, it becomes hairy. During the market volatility, authorities decided to stop using circuit breakers- measures which were supposed to keep the markets from incurring huge drops in a day. Instead of stabilizing markets, it just led to a broader sell-off. On top of that, the China Securities Regulatory Commission extended a ban on sales by major shareholders. Again, instead of aiding stability, it simply led to a smaller shareholder stampede towards the exit.
  • Does Beijing still want to engineer a sharp drop in the yuan? Initially, the local currency was allowed a competitive devaluation…only then then to be guided higher by authorities. Suddenly the safe-haven currencies, like the yen, look very tasty to many, and don't be surprised if we see more position unwinding through the year. The South African Rand already collapsed to record lows with Japanese investors selling out of their long positions in exchange for dollars…only to then sell dollars for yen.
  • Continued capital flight. Bigger local Chinese investors are not going to keep all their money at home while waiting for clarity on what the new improvised rule book of Chinese investing is. My guests have been telling me that US assets could benefit from new capital inflows from Asia.

Closing out the end of last week, I asked viewers to tweet their thoughts on whether the Shanghai Composite really matters to international investors.

One viewer, Steve, replied: "Yes. Because if the Shanghai Composite was up 5 percent, world markets would be flying."

So keep your eyes on China, and here's to a good 2016!

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