China, China, China, Why is it always about China.

An article in the New York Times about yesterdays stock tumble (unwittingly) lays out how China's bureaucratic medaling in their economy is going have consequences far beyond Shanghai.

1) Its obvious that the government’s actions caused yesterdays stock drop because when they announced a reversal, the market rebounded. The Communist government originally tinkered with the market, I believe, to stop the spread of capital inflows. The Shanghai market lists mostly companies that the government has a majority stake . If investors are gaining a larger and larger share of "their" companies it can only lead to political liberalization, which prompted them to take action.

“Both mainland Chinese markets rose nearly 4 percent today after state-controlled media reported that the government might allow greater foreign investment in Chinese stocks and would not impose capital gains taxes on stocks soon.”

2) They have manipulated their currency on a massive scale.

“The Chinese government has limited the appreciation of the country’s currency, the yuan, by buying dollars on a massive scale. As a result, it has accumulated more than $1 trillion in foreign exchange reserves.”

3) The currency manipulation has over inflated the market (this makes a bubble burst more painful) and caused the economy to be dependent on exports to the US.

“To pay for the dollars, the Chinese central bank has issued hundreds of billions of yuan. The central bank has been able to absorb some of these extra yuan by selling more government bonds to Chinese banks and the public. But part of the extra cash issued to pay for currency market intervention has made its way into the financial system. This has contributed to steep rises in stock prices — the Shanghai stock market rose 130 percent last year — and in real estate prices. The slump in share prices on Tuesday has raised questions about the long-term sustainability of high prices for Chinese assets.”

“But the region remains dependent on exports, especially to the United States, Mr. Nag said. China is among the most dependent of all, he said, with international trade in goods equal to 65 percent of its economic output last year.”

4) We are now dependent on their money.

“China is now a leading source of global capital, with the money funneled back into global financial markets through Chinese investments in Treasury bonds and other securities. “So when people get anxious that China may turn that tap off, we get market reactions like yesterday,” Mr. Condon said.”