Chinese equity markets fell an additional 5% today as their equity markets continue their wild ride. The Shanghai Composite is down nearly 18% and quickly approaching bear market territory. Economic pressure is part of the problem, but another contributing factor is the fact that Chinese regulators don’t seem to know what they are doing. Just last week regulators suspended the circuit breaker for their stock markets. It seemed obvious to most except the regulators themselves that these did little help settle the markets and caused more panic in that traders were uncertain how long markets would be open to trade. The last day before the circuit breaker rule was put in place trading lasted little over 30 minutes.
These most recent problems are just the tip of the iceberg when it comes to Chinese equity markets. Just last summer as the problems in the Chinese equity markets was beginning for days at a time there were less than 30% of the companies trading for fear of continued losses. The main issue seems to be that Chinese regulators and government official do not understand the concept of liquidity and the importance of maintaining a free-flowing market. The Chinese feel that in the end government can control everything including financial markets. This has been a hard lesson learned over the past few months. This has also put a significant dent in the armor that was the Chinese economy. For years the world’s second-largest economy was the envy of the west. Now with the recent problems with their equity markets China has lost the confidence of the rest of the world.
China’s woes look far from over, and it seems like a matter of time until they make another reactionary mistake with their markets or the RMB. China may want to look to the west for ideas and a way to get a handle on their markets by adapting some of the market policies of the US and Europe.