Salient to Investors:

Stephen Roach at Yale writes:

Market manipulation a la China is now standard operating procedure in policy circles around the world – the West just dresses up their manipulation in different clothes.

QE is essentially an aggressive effort to manipulate asset prices: whether it has succeeded is debatable along with central banks’ unsubstantiated claim that things would have been much worse had they not pursued QE.

China appears less focused on systemic risks to the real economy because wealth effects are significantly smaller in China, where private consumption is 36% of GDP, half that in more wealth-dependent economies like the US. By keeping its benchmark rate well above zero, the PBOC is better positioned than other central banks to maintain control over monetary policy and avoid the open-ended liquidity that is so addictive for frothy markets. China’s targeted equity-specific actions minimize the risk of financial contagion caused by liquidity spillovers into other asset markets.

Nearly 90% of the 12-month surge in the CSI 300 was concentrated in the 7 months following the Shanghai-Hong Kong Connect in November 2014, so speculators had little time to let the capital gains sink in. The likelihood of forced deleveraging of margin calls underscores the potential for a further slide once full trading resumes. The development of stable equity and bond markets is a high priority in China’s effort to promote a more diversified business-funding platform, so the equity collapse calls that effort into serious question.

Time and again, regulators, policymakers, and political leaders have condoned market excesses, a growth elixir when labor income is under constant global pressure. These bubbles always burst and the false prosperity is exposed.

Read the full article at–roach-2015-07

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