The Great Fall
Beijing Slams on the Brakes After Securities Sell-Off

The Chinese authorities slammed the brakes on major bond futures trading on Thursday, following a panic-driven sell-off that bodes ill for the Chinese economy. The Wall Street Journal:

Chinese authorities halted trading in key bond futures for the first time on Thursday, as panicky investors sold the securities on concern that a long, credit-fueled bull market was coming to an end amid slowing growth, capital outflows and heightened government concern about asset bubbles.

China’s 10-year and 5-year Treasury bond futures recorded their biggest ever drops in early trading, falling by 2% and 1.2%, respectively, prompting exchange authorities here to suspend the securities. Trading resumed only after China’s central bank injected around $22 billion into the short-term money market. The 10-year government bond yield, which rises when prices fall, meanwhile hit a 16-month high of 3.4%, extending a selloff in Chinese bond markets that began in late November and has accelerated this week. […] 

The U.S. Federal Reserve’s decision to raise interest rates helped trigger the selloff. Chinese investors believe it increases the chance China will guide its own rates higher to stem the yuan’s recent decline against the dollar and heavy capital outflows from the country.

China’s latest market panic adds to a growing body of evidence that the Chinese economic model is in serious trouble. The proof has been accumulating all year. Chinese authorities have lately had their hands full in clamping down on increasing capital flight, trying to quietly quash a series of asset bubbles (especially in the housing market), and dealing with thorny demographic issues like pension shortfalls and brain drain in the industrial northeast. Meanwhile, growth is slowing, the renminbi continues to fall, and central efforts to stem the bleeding through capital controls threaten to accelerate the asset bubble problem.      

As each crisis comes up, Xi has shown a preference for ad hoc market interventions over lasting reform, a choice reflected in recent personnel decisions. Even as China pursues its long-promised “market economy status” at the World Trade Organization, Xi’s stewardship continues to demonstrate how far that designation is from reality. And disagreement over that very designation is already stoking trade tensions between China and the West, as the European Union and United States seek to punish China for its dumping of excess steel, and Beijing launches a legal challenge through the WTO to secure market economy status and make such retaliation more difficult.  

It is important to remember, then, that what happens in China won’t stay in China. Beijing’s economic woes, and the decisions Xi takes to deal with them, can rattle world markets and escalate tensions during a politically sensitive moment.  With an incoming U.S. President who has railed against China’s trade practices and promised to “get tough” with Beijing, we could be in for a more combative trade relationship in the years to come.

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