Mark Mobius: China’s Conundrum

Mark Mobius, executive chairman of the Templeton Emerging Markets Group comments on the Chinese governments conundrum between stability and market liberalisation.

New-year celebrations in the Western world gave way to concerns about China as its stock market opened 2016 with a loss, triggering declines in equity markets globally. The 7% decline in China’s domestic A-share market on January 4 was enough to trigger China’s new circuit-breaker system, halting transactions on the first day of trading in the new year and prompting government intervention to prop up stocks.

Retail investors were certainly involved in the selling but also large shareholders, particularly top company executives who hold shares in their own companies. This is why the Chinese government has put restrictions on the amount they can sell. To ease the panic in the market, China’s securities regulator (the China Securities Regulatory Commission) just announced a cap on the size of stakes that major investors would be allowed to sell to only 1% of a company’s shares. This would be effective for three months starting on January 9.

The entire psychology of the market has not been good for a few reasons, one being the decline of China’s currency, the renminbi (RMB), which has prompted investors to exit RMB-denominated assets such as Chinese-listed shares, and also because of the fear that the Federal Reserve’s decision to raise rates in the United States could negatively impact other economies. There is still some uncertainty about further rate changes ahead but the current expectation is that US interest rates may even go higher.

Clearly, many investors are worried right now. As we see it, there is no question that China should continue to have strong growth this year, but one might say China is facing a bit of a conundrum. On the one hand, the government wants stability, but on the other, it also is striving toward more openness. That means we could see more volatility in China’s market this year as these conflicting forces play out.

It’s important to remember that China’s economy is a planned economy, something that I think has been overlooked by many people when they ponder the possibility of bank failures, overleverage and other worst-case economic scenarios. At the end of the day, the Communist party (the state) is determining the direction of the economy and, in our view, has the wherewithal to take measures it feels are needed to further its goals.

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