The People’s Bank of China
(PBOC) started the New Year with a downward currency adjustment and fireworks
followed.
Last week, three distinct
issues affected China’s stock market. First, the PBOC’s devaluation of the yuan
(a.k.a. the renminbi), along with the knowledge the central bank had been
spending heavily to prop up its currency in recent months, led many analysts
and investors to the conclusion China’s economy might not be as robust as official
reports indicated, according to the Financial
Times.
Not
everyone was surprised by this revelation. During the fourth quarter of 2015, The Conference Board’s working paper
entitled Global Growth Projections for
The Conference Board Global Economic Outlook 2016 reported:
“China’s economy grew much
slower than the official estimates suggest in the recent years. During the last
five years, our estimates suggest an average growth of 4.3 percent, which is
substantially lower than the official estimate of 7.8 percent. In 2015, we
project China to see an average growth of 3.7 percent, which is indeed lower
than the official target of 7 percent.”
Second, state-run media
made it clear the Chinese government would not step in to spur growth. Allowing
market forces to play out is a requirement of the reforms international
investors have been demanding of China, according to Barron’s. The publication suggested
Chinese President Xi Jinping is the victim of a Catch-22. The Chinese
government took steps toward reform and international investors responded by
selling shares in a panic:
“Weaning China off
excessive credit, investment and import-led growth in favor of services means
slower growth. Markedly slower, in fact, than the 6.5 percent Beijing is gunning
for this year. But Monday’s 7 percent stock rout shows international investors
want it both ways. The rapid growth, innovation, and disruptive forces that
capitalism produces? Yes. The downturns and volatility that come with it? Not
so much.”
The third factor was
China’s new and very strict stock market circuit breakers, which were
introduced on January 4. The circuit breakers were intended to calm overheated
markets, but they sparked panicked selling instead. When the Shanghai Shenzhen
CSI 300 Index falls 5 percent, Chinese stock trading stops for 15 minutes. When
the index is down 7 percent, trading stops for the day. A similar mechanism is
employed in U.S. markets, which are far less volatile. However, trading is not
delayed until the Standard & Poor’s 500 index has fallen by 7 percent, and
it does not stop until the index is down by 20 percent. Last week, China’s
stock markets closed twice as investors, who were worried the circuit breakers
might kick in, rushed to sell shares.
China suspended its circuit breakers on Thursday, and the PBOC set the value of the yuan at a higher level. That helped China’s stock markets, and others around the world, settle. China’s markets gained ground on Friday, although U.S. markets finished the week lower. Markets may continue to be jittery next week as “a tsunami of negative psychology driven by China” works its way through the system, reported Reuters.
fourth quarter, a look back…
The Federal Reserve pulled the trigger. At the December Federal
Open Market Committee meeting, the Fed finally acted, tightening monetary
policy by raising the funds rate from 0.25 percent to 0.50 percent. It’s
important to remember the Fed doesn’t actually set interest rates. It takes
actions designed to influence financial behaviors. The Fed has given rates a
push, it remains to be seen whether its efforts will bear fruit.
The European Central Bank
(ECB) acted, too. Although,
its monetary policy moved in a different direction, offering additional
stimulus measures to support European economies. Investors were enthusiastic when the ECB
announced its intentions; however, markets were underwhelmed when the economic
measures delivered were less stimulative than many had expected.
China’s currency gained status. The International
Monetary Fund decided to add the Chinese yuan (a.k.a. the renminbi) to its Special
Drawing Rights basket, effective October 1, 2016. After the renminbi is added,
the U.S. dollar will comprise 42 percent of the basket, the euro will be 31
percent, the renminbi will be 11 percent, the Japanese yen will be 8 percent,
and the British pound will also be 8 percent.
Congress tweaked Social
Security.
The Bipartisan Budget Act of 2015 (BBA) averted a U.S. default and deferred
further discussion of U.S. debt and spending levels until after 2016’s
presidential and congressional elections. It also did away with two popular
social security claiming strategies. The restricted application strategy was discontinued at the end
of 2015, and file and suspend strategies will be unavailable after May 1, 2016.
Medicare premiums go up,
but not for everyone.
The BBA also limited increases in Medicare premiums. About 14 percent of Medicare beneficiaries will
pay higher premiums in 2016. The new premium will be $121.80, up from $104.90
in 2015. Original proposals suggested the premium amount increase to $159.30.
Weekly Focus – Think About It
“If
you do not change direction, you may end up where you are heading.”
--Lao Tzu, Chinese philosopher