With the Chinese markets continuing their downward spiral for February, the People’s Bank of China has decided to lower the reserve ratio for their banks. This means the Chinese government has decided to “leverage” their way out of a falling equity market and slowing economy. Probably not a good idea for longer-term stability, but I’m sure they’ve been learning from our Federal Reserve how to increase debt levels so you don’t have to face the music.
We believed 2015 was kind of a bumpy ride for markets, but it looks like 2016 might be even rougher! Financial markets in China were roiled earlier this month and the Hang Seng, Shanghai and Shenzhen finished the month down -10.2%, -22.6%, and -26.8%. This massive sell-off, which caused several days of circuit breakers to shut down their markets, has affected global markets more in sympathy than due to a direct relationship. At the risk of over simplifying a complex system, we’ll state the Communist government (China, not ours) only allows foreigners to own about 1.5% of all shares in their markets. So a direct relationship probably isn’t too material, but if their economic growth really is slowing, which we believe it is, then there will be a ripple effect on the countries that sell to China. This will especially be the case for commodity sellers, and this does have a direct relationship to many industrial countries, including the U.S.