What Does China's Volatility Mean?

04/29/2015 12:01 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

It has been quite a wild few weeks in China and MoneyShow's Jim Jubak shares what he thinks this could mean over the next few months.

We've had a series of really huge volatility events in China over the course of a very short period of time starting, really, on April 17 and going through April 21.

This is what we had.

We had a big restriction on margin debt. That was the first event, which took place after the markets had closed on the 17th, but the futures market in Hong Kong fell about 2% afterhours and you wound up with a cascade around the world of everything falling, so that was an effort to, sort of, rein in money supply.

Then, over the weekend, what you had was an announcement from the Peoples Bank of China that they were going to cut reserve requirements and that banks would have an extra $140 billion or $150 billion to lend because they wouldn't have to keep so much in reserve. They cut reserve requirements by one percentage point, much bigger than anyone was expecting, expecting about half of that, and later, so a big boost to the economy.

If you look at those two things, you sort of go, well, what's going on here, and, then, if you go back a little further, you say, oh, well, so they cut back on margin loans, maybe they were worried about there being a bubble, but then you remember that only a couple of weeks before regulators had moved to allow individuals to open as many as 20 different accounts rather than just one.

You sort of go, okay, so they're worried about the bubble, they're not worried about the bubble, they're actually feeding into the bubble, they're stimulating the economy, they're taking money out of the economy, what's going on here?

Our tendency is to think that China is kind of monolithic. It is a centrally controlled economy and financial system but that doesn't mean there aren't tensions within the bureaucracies and I think that's what we're seeing right now.

I think there's a group, which I think, at the moment, as far as I can tell, is centered in the Peoples Bank that's worried about growth and I think that's why you're seeing stimulus out of the Peoples Bank, things like changes in mortgage requirements and changes in the reserve requirements.

The idea is that China's growth is down to 7%, you don't want to have it fall much further than that, and I think the Peoples Bank is worried about that.

Then, you've got another group of people, I think regulators of the financial system, that are worried about the bubble, that are worried about bad debt, that are worried about defaults in the system, not so much defaults happening but cascading into larger defaults if they don't control the bubble, and I think that's what you're seeing from this group of regulators who are fighting, really, to try to make sure that the system doesn't get out of control and they're the ones who are sort of clamping down so you've got these two different things going on.

Yes, indeed, it's one government, one centrally controlled economy and financial system, but I think you're seeing a tug-of-war inside that government about what to do—and what's more important and what's the bigger worry—and that's why I think we're likely to see a continued string of seemingly contradictory moves toward stimulus, toward restraint, toward letting the bubble go, toward trying to pop the bubble over the next couple of months.

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