China is panicking over a market bubble. What would it do in a real …
The Chinese stock market: officially sanctioned prices? Illustration: David Simonds/The Observer
As Greece holds a referendum that may create more uncertainties than it solves, are we looking in the wrong place for a financial crisis? In China, the authorities are in a fine sweat about a more traditional financial conundrum: a bubble in the stock market. How do you deflate it safely? Should you even try?
As with many things in China, the numbers are staggering. The two main indices – the Shanghai Composite and the Shenzhen Composite – had risen about 150% in the 12 months to mid-June. In terms of market value, that was a gain of about $6.5tn. Since then, the market has tumbled almost 30% – call it a $2tn plunge.
What’s the big deal? Shares never go up in a straight line and anybody who bought a year ago has still more than doubled their money. But there are several potential problems, at least to Beijing’s apparent way of thinking.
First, there are a lot of latecomers to the share frenzy. In May, just before prices started to fall, 12 million trading accounts were opened.
Second, some latecomers are novices ill-equipped to take losses. Trading on margin – using borrowed money – is commonplace in China, raising the likelihood that losing investors will be forced to get out in a hurry, creating more selling pressure.
Beijing was sending a message that it is setting interest rates for the stock market rather than the economy
Third, a crash in the share market could hit the real economy. Consumer confidence could be damaged. More directly, companies could find it hard to raise capital and the gradual liberalisation of the Chinese economy could stall as locals and foreigners conclude it is safer to stay away.
Such worries explain why the authorities seem so keen to put a floor under share prices. Interest rates have been cut and margin requirements have been relaxed, seemingly to help investors with their backs to the wall. Banks have been told they can hold less capital with the central bank, freeing up liquidity in the financial system. So far, nothing has worked.
On Friday, operations took a new direction. The securities regulator said it would look for “clues of illegal manipulation across markets”. In other words, short-sellers and devious individuals are being blamed – a traditional excuse for authorities who like there to be a culprit. Maybe more measures will follow if the market continues to fall. Already, voices can be heard calling for direct intervention – in other words, the state buying shares.
The Chinese do things differently, but these measures seem a ridiculous over-reaction. If the authorities feel compelled to intervene every time the stock market rises 150% then corrects by 30%, they are creating massive problems for the future. Investors will believe it really is true that the share prices are “officially sanctioned”. Instead of assessing companies’ prospects intelligently, investors will try to guess the intentions of the bigwigs in Beijing. You can’t liberalise an economy that way; you just create the risk of an even bigger bubble next time.
Even if one accepted the dubious proposition that emergency measures could be justified to prevent damage to the wider economy, the authorities acted far too soon. The interest rate cut came after a 20% fall from the mid-June highs. That was a mere slip in the context of the market’s rise. No wonder investors were not reassured. Beijing was sending a message that it is setting interest rates for the stock market rather than the economy. What happened to famous Chinese long-termism?
The only certain way to deal with a stock market bubble is let prices fall to the point where they are cheap. At 20 times earnings, the Chinese market is not an obvious bargain even after these declines. The deeper worry is this: if the Chinese authorities think a wobble in the stock market is a threat to financial stability, do they have the ammunition to cope with a proper crisis in the more important property market?
Click, collect and cough up – the new retail trend is no longer free
The John Lewis click and collect service has been a huge success. Anyone who really needs another lip gloss or a new pair of tights can order by 8pm and the item is ready to collect at a John Lewis or Waitrose supermarket branch after 2pm the next day. Whether the item cost £3 or £300, there is no delivery cost to customers.
About half of the department store’s online orders make use of the service, and the number of items being clicked and collected has exploded from 350,000 in 2008 to some 6 million now.
But from the end of the month John Lewis will no longer allow free pick-ups on purchases of less than £30. Customers will have to hand over £2 to pick up lower-value purchases in store.
It was inevitable. Shipping individual items out of a centralised warehouse in Milton Keynes, overnight, to one of hundreds of possible destinations makes no financial sense if the goods are worth just a few pounds. The profit margin on the item would be slashed. Andy Street, managing director of John Lewis, had just the word to describe this sales model: “bonkers”.
The collapse of City Link – which delivered goods for John Lewis – at Christmas shed light on the cost pressures of home deliveries. Drivers described how they received £2.15 per delivery, no matter how many items were going to one house.
Free click and collect is still on offer at Marks & Spencer, Next and House of Fraser. But rivals will be watching the impact of the new John Lewis delivery charge, and simultaneously keeping an eye on Amazon. The online retailer last week unveiled a new Prime Now service that offers deliveries in some areas of London within an hour for £6.99, or free within a two-hour slot.
The likelihood is that people will pay up – £2 is not a big ask for JL’s well-heeled shoppers. But the charge – and the new Amazon deal, which will be rolled out beyond London in coming months – show that delivery options are now a key part of the offer.
A bad reason to shorten a lifeline for savers
Greeks queuing to take their cash out of banks evoke memories of the run on Northern Rock in 2007. So it is apt that it should be last week that the Bank of England had to announce a £10,000 cut to the amount covered by the deposit protection scheme, which became such a focus during the banking crisis.
Since the end of 2010, £85,000 in savings accounts in the UK has been covered by the scheme, which guarantees a saver’s money should a bank, building society or credit union go bust. The level was based on the threshold of €100,000 set across the European Union at the height of banking crisis; uniformity was needed to stop savers pushing their cash across borders to chase the best protection. But as Andrew Tyrie, chair of the Treasury select committee, points out, it is absurd that the level of protection for UK savers should depend on currency fluctuations, forcing a cut in the guarantee to £75,000. Someone needs to take action.
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China is panicking over a market bubble. What would it do in a real …
