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An Unhealthy Linkage

08/25/2015

The main Chinese stock exchange lost another 7.6% last night, which is a slight improvement over the 8.5% loss the previous day.  This morning, the futures market indicates that the U.S. stock market will open higher, much higher.  One reason for the strong futures indication is that the People’s Bank of China (PBOC) just announced a cut in interest rates and an easing in bank reserve requirements.

The media has been reporting the current market collapse resulted from last week’s devaluation of China’s currency, the yuan.  The argument is that the devaluation was an admission that the Chinese economy, which has been the world’s economic growth engine, was sputtering and, without China, worldwide stock markets cannot continue to grow.

That is wrong!  A devaluation helps the economy, by boosting exports.  Instead, the current market collapse resulted from China’s intervening in their stock market, primarily by a ban on selling stock.  Nothing focuses an investor’s mind as much as telling him he cannot get his cash.  That is a guarantee of panic selling sooner or later.

While the currency devaluation, interest rate cut, and reduced bank reserves will help the overall Chinese economy, I expect the Shanghai stock market to continue falling.  But, I am optimistic the linkage between that stock market and other markets worldwide has been broken, at least partially.

Capitalistic inventions (like the U.S. stock market) do not play well with non-Capitalistic versions (like the Chinese stock market).

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