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Faster than a speeding Fed chairman
So why will this -- and the moves likely to follow in the next few months -- rescue financial markets when the U.S. Treasury and Federal Reserve so far haven't been up to the task?Let me give you five reasons:
- China has a lot more firepower at its command than the Federal Reserve or the U.S. Treasury, and everyone in the world knows it. Beijing's foreign-exchange reserves stood at $1.8 trillion at the end of June. No one is worried, as some people are about the Federal Reserve and the U.S. Treasury, that the country will run out of money or go so deeply into debt that it will undermine its currency.
- China's opaque (to be polite) accounting means the country's banks don't face the possibility of being cut off from the capital markets because some credit-rating agency downgrades their debt. Chinese banks are perfectly able to operate in a state of "technical" bankruptcy for years without serious consequences. So China doesn't face a domestic crisis in its financial institutions.
- Chinese leaders feel no ideological barriers to nakedly intervening in the stock market. Investors aren't outraged by this intervention. They expect it and are disappointed when the government fails to support stock prices. Most investors in China believe that the stock market is "fixed" and that the government sets prices at whatever level is required by national policy. So investors in China are intently focused on searching for clues to where the government wants prices to go. The latest moves, then, are an expected and powerful signal that the government wants prices to rise.
- Since China doesn't face a U.S.-style financial-sector meltdown right now, the government is uniquely able to focus on the economy. The Federal Reserve and the U.S. Treasury can't simply cut interest rates in order to revive a slowing economy, because that would weaken the dollar, leading international investors to cut back on their purchases of U.S. debt. That in turn would make it even harder for U.S. financial institutions to raise capital and potentially deepen the U.S. financial crisis. Beijing doesn't face those constraints. It can manage for growth, and it is doing so. With that focus and with the resources available to it, if it wants to, China can increase the growth rate in its economy even if the rest of the world is slumping. And the evidence right now is that China wants to increase growth.
- An accelerating Chinese economy -- or even the expectation of one -- is big enough to pull other economies with it. That's especially true for the resource-rich economies of Australia, Canada, Brazil, South Africa, Russia and the Middle East.
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If these five reasons play out just right, they could lead to a scenario in which stock prices in China rise, giving global investors one thing that's critically missing in the current financial markets: a reason for putting money into a financial market anywhere in the world. A climbing Shanghai market would be especially reassuring to investors in other emerging markets who have been clobbered this year.
Accelerating growth in the Chinese economy and rising prices on Chinese stocks would spill over into the resource economies of the world, ending the plunge in Australian and Brazilian markets, for example. A rising Shanghai stock market would also give Chinese companies greater credibility as sources of capital for resource-development projects outside China. And finally, just being able to see a stock market that isn't going down and an economy that isn't slowing but is actually accelerating might be enough to break the fear that has gripped developed markets in New York, London and beyond.
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Is this really a free economy?US financial markets increasingly resemble those in China, says Jim Jubak. In both Shanghai and New York the rule is "Privatize the profits and socialize the losses."
I grant you that this is all a lot to hope for from one interest-rate cut and one stock market intervention, no matter how major. I don't expect that these first steps from China will be enough to stabilize the global market and the global economy. For stocks to stop falling around the world and for troubled economies in the United States and Europe to move toward full-speed growth, a lot more would have to fall into place. But China's actions might be enough to remind investors that the world isn't coming to an end, there are profits to be made tomorrow and there is a way out of our current mess.
And that might be enough to put an end to the current panic that has so caught up all of the world's financial markets. That's just a first step. But, as Lao Tzu said, a journey of a thousand miles begins with a single step.
At the time of publication, Jim Jubak did not own or control shares in any company mentioned in this column. He did not own short positions in any company mentioned.
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