Friday, 8 January 2016

Removing circuit breakers proves China lacks the expertise

I must admit that the whole debacle around Chinese equity moves that have dominated world headlines has got me frustrated by the problematic situation I find myself in by being unable to find alternative themes to report on. However I don't think we're in the full swing of things yet and with the crucial importance of China to the health of the global financial system at stake, we shouldn't stray far away or else we may risk failing to see the whole picture to a story of epic proportions.

 Late yesterday (early morning US) the Chinese regulatory authority announced that it would be scrapping the system of circuit breakers for the time being after it had caused two trading halts in a 4 day period which does highlight the extent of fear spreading in China's equity markets.

Incredibly the system has only be in place since the beginning of the year and would in all likelihood take away a huge chunk of confidence in Chinese authorities ability to deal with the situation on the ground. Earlier in the week I had said that China had failed miserably in its attempts to liberalize its financial markets which was quite concerning given that in a relatively short span of time they have shot up the list of important financial markets to be followed.



This latest move along with a renewed effort by the so called "national squad" whose objective thus far has been to support equities from a complete collapse that would make policymakers look amateur compared to their developed counterparts has left many confused as to what measures are being taken to prevent further haemorrhaging.  But here's the thing, are they risking the well being of the entire global financial system because their egos have been dented by their lack of expertise and experience?  Possibly yes

What does this all mean?

Given the sudden about turn stance that has happened involving similar situations less than 8 months apart from each other means that 2016 is bound to produce extended periods of speculative volatility which may hamper trading in the short term. The difficulty will be determined by the markets measure of confidence in the action taken by Chinese regulatory authorities and if they do not harm the transparency of what would be expected under normal trading standards.

The fact that no clear and defined rules have been set in concrete opens up the possibilities for uncertainty to enter the fray that could distort reality and ultimately damage the image of financial markets in China by drawing comparisons closely to that of a dysfunctional market doomed to fail in attracting much needed foreign investment due to the lack of proper systems that support investor confidence.

This certainly doesn't fit into the goals of the Chinese government which does tend to sway the sentiment towards finding a longer term solution to deal with these problems but until we see active discussion or any kind of acknowledgement by those in high office we will continue to witness the unsteadiness as we have seen this week.
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