The Shanghai Composite traded as high as 3,382 during Tuesday trading, before reversing 5.5% lower to end the week at 3,192. The Shanghai Composite previously surged 16% over eight sessions (June 30th to July 9th), highlighted by a 5.7% jump on July 6th. This index sank 4.4% on July 16th – and then fell 3.9% in Friday trading. China’s growth-oriented ChiNext Index sank 6.1% Friday.
COVID stimulus stoked Bubble Dynamics for global risk assets, certainly including Chinese equities. This Bubble has turned unstable. Chinese stocks reversed sharply lower after the U.S.’s shocking closure of China’s Houston consulate. Fundamentals and geopolitics do matter.
July 23 – Reuters (Fred Imbert): “China said the U.S. move to close its Houston consulate this week had ‘severely harmed’ relations and warned it ‘must’ retaliate… Washington… gave China 72 hours to close the consulate, which it said was ‘to protect American intellectual property and Americans’ private information,’ a dramatic escalation of tension between the world’s two biggest economies. Chinese Foreign Ministry spokesman Wang Wenbin described the U.S. allegations as ‘malicious slander’ and said the ‘unreasonable’ move had ‘severely harmed’ relations. ‘China must make a necessary response and safeguard its legitimate rights,’ he said…”
It has been an alarming deterioration in U.S./China relations over recent months. Bubble markets have been content to disregard what has been a virtual collapse in relations over recent days and weeks.
The unfolding U.S./China cold war is most regrettable. The only surprise, in my eyes, is that the relationship held together as long as it did. It was destined to mature into an intense superpower rivalry. From a Bubble Analysis perspective, the boom cycle fostered the perception of an expanding economic pie. Cooperation and integration were considered mutually beneficial. It was also unsustainable.
Stark changes in perceptions and relationships are fundamental to the bursting global Bubble thesis. The economic pie is stagnating rather than expanding. It’s become a zero-sum game – an inevitable new zeitgeist accelerated by COVID. Even as their respective Bubbles floundered over the past 18 months, an attitude persisted that the U.S. and China needed to work together to ensure stability. No more. (more…)