Investors are confused over what’s happening in China after a week of enforced trading stoppages, rises and falls that seem to have no sensible reason.
Twice this week, plunging prices on the Shanghai Stock Exchange tripped a circuit breaker that switched the market off.
The breaker clicks on if the market sharply falls – but has been scrapped after only four days in operation after the double trip.
The breaker was designed to stop drastic volatility in the market and control speculation, but instead left traders and investors in a worldwide panic.
The market saw only 15 minutes trading before the second trip.
Investors and traders spooked
Now the breaker is in the bin, the market ended the last day of trading 2% up after falling up to 12% on other days.
Many traders believe the problems result from Chinese naivety in managing free markets.
The currency market has faced similar problems after the People’s Bank of China agreed to relax control of the yuan and let the markets take the currency to a level where traders felt happy.
Taking sudden action tends to spook investors and traders who take the view that if they do not understand why something is happening, then the best course of action is to protect their assets by pulling their money out.
China needs to take heed of this lesson as the butterfly effect of a plunging Shanghai market ripples around the world wiping billions off the value of shares and pensions.
Burning through cash
Regulators in China are thought to have burned their way through £1 billion of currency reserves last year as they attempted to manipulate and restrain financial markets without success.
Behind the scenes, the Chinese government wants to switch the economy from manufacturing to a consumer spending model, but has no experience of managing a free market, consumer economy.
The move is laying waste to many other economies.
Brazil is in recession, African raw material producers are suffering from plunging prices and are closing mines and laying off workers.
Undoubtedly, China will switch to a consumer economy, but perhaps the pace is too fast and the side-effects are damaging too many other countries.
