The global markets’ turmoil has increased market volatility and potentially causing an uncontrolled financial meltdown. However, at this point in the process, economists at the Federal Reserve Bank and private financial analysts do not foresee the financial contagion triggering a 2008-2009 meltdown. PTB’s assessment is that there will not be a major financial meltdown, but it does not diminish U.S. national security concerns.
There are three major components to U.S. national security concerns are:
1) Shanghai stock market decline and slower economic growth.
2) Greek debt crisis triggering a political split in Europe
3) Glass-Steagall impact on U.S. and global markets
First, Shanghai Stock Market declined despite government intervention. It is significant because of the attempt to stabilize the markets by the Chinese authorities failed to prevent the present decline. The stock market drop of 8.5% does not mean an uncontrollable market collapse is underway. In fact, PTB assessed the following:
“The Shanghai market drop caught the Communist Party of China (CPC) and Chinese government officials by surprise. ” The problem is that the fundamentals of the market cannot be controlled by the CPC and the reality for China is that the Shanghai market remains overvalued despite the decline in valuations.
Shanghai equities’ price earning rations remain twenty times larger than Wall Street. So, it is assumed that the volatility will continue despite Chinese government intervention. Over the past year, individual Chinese investors were able to borrowed money on the margins that grew the market by over 100%. The Chinese government encouraged lending by banks and non-bank institutions creating a “false perception” about the market and Chinese economy. The systemic cause of the Chinese stock market decline is the result of “government easing policy” that senior CPC officials believed could offset the perception about the real economy’s slowdown. Chinese officials believe that strong market showing reflects on the CPC and government. Now, the luster is off.
There is a more fundamental reason for the upheaval. According to IC and Federal Reserve experts, China is undergoing a transition from a cheap labor and export driven economy into something different. The transition from an export driven economy is difficult to achieve and these experts believe it is work in progress and highly unstable. The question posed for Japan, U.S., Europe, and institutional investors is where is the Chinese economy going?”
One of the transitional problems is that there is a lack of sophistication within the governing bodies of the party and government ministries. This lack of sophistication causes at least 100 basis point drop in value in the stock market, according to one private institutional investor. PTB assessment is that one of the problems in China is the failure of senior officials to seek advice from experts in the Chinese system who are not senior and recognized experts by party and government officials. In some case, the “outside experts” warnings were ignored and their advice was not taken into account.
Moreover, there is an ongoing decline in the “physical economy” of China. Chinese government statistics about present and future Chinese economic growth are inaccurate. The actual real economic growth is between 3-5%, not the 7% announced by the government. Therefore, the Shanghai market downturn may or may not impact on the Chinese economy and global financial system in a significant manner.
Large U.S. multi-national corporations, such as Caterpillar, General Motors and Apple face significant loss of market share. One of the results of the real economic downturn affecting corporate earnings and future growth in the Chinese market. Share prices of these corporates will decline in the U.S. stock market.
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