Following about 6 weeks of wild volatility that included a series of steep losses, the Shanghai Composite index, mainland China’s benchmark stock index, managed to add 5.3% overnight on Thursday. The speculation, however, is that this sharp movement was more attributable to rescue measures enacted by the Chinese government as part of its long-standing program of state intervention in the markets.
However, after a supposed “one-off” 1.9% devaluation of the yuan by the People’s Bank of China on August 11th, the Chinese currency (and, by extension, the markets in general) was purported to be free-floating as President Xi Jinping and the Communist regime appeared to abandon its de facto peg to the U.S. dollar. The conspicuous, last-minute rally on Thursday, however, is almost unanimously being painted as a signal that the PBoC again aggressively intervened to prop up equities.
Beijing to the Rescue
The Shanghai Composite was trading 1% in the negative with less an hour left in the session when, quite suddenly, the index shot up to 5.3% before markets closed. In about 45 minutes, the index swung more than 600 basis points. For anyone watching, it must’ve seemed surreal. On an exchange where some 85% of shareholders are retail investors, is it plausible that nearly every one of them decided to act in unison and drive the market higher (if that’s even possible)?
Or, far more likely, the Chinese authorities intervened in order to prop up the markets. Beyond simply keeping the country’s equities market afloat, the regime had several reasons for aggressively supporting stocks.
Part of Beijing’s move overnight was to dump a large sum of U.S. Treasuries in order to cover the amount of funds being pumped into equities. China is essentially in parity with Japan for the title of largest holder of U.S. bonds in the world. Similar to the reasoning for why the last-minute surge in Chinese stocks was the work of the regime, there are few entities that held such a large amount of Treasuries and had the motivation to sell them in order to affect such a spike in the yield on U.S. debt. After slipping below 2% earlier in the week, the 10-year T-note yield jumped to 2.20% overnight before easing slightly during trading in New York.
On September 3rd, China will be celebrating its annual Victory Day, which honors the end of WWII—specifically, China’s liberation from (or rather, triumph over) Imperial Japan. This is the 70th Victory Day celebration, and markets will close for two days in observance of the holiday.
There is quite a bit of speculation that the intervention by the state is partly related to a political strategy of maintaining the populace’s confidence in the Communist party’s ability to control the economy leading into the two-day market holiday for Victory Day. Especially when nationalistic sentiment will be riding high, the regime doesn’t want any appearance of its weakness or failure to be on the minds of the people.
And Now For Something Completely Different . . .
The stereotype that China is the counterfeit capital of the world (not an entirely untrue characterization) just got new fodder when the Western media noticed that a company in China is essentially posing as Goldman Sachs. Somehow, the firm is operating with the same exact name in Chinese characters (gao sheng) as the real Goldman Sachs Group, Inc. The Chinese knock-off (for lack of a better term) calls itself Goldman Sachs Financial Leasing Co., and its name seems to imply it is merely the Shenzen branch of the bona fide Goldman Sachs. As far as copyright infringement goes in China, whoever registers first gets the trademark or branding, regardless of whether or not it’s already licensed by some large foreign brand.