China’s stocks were suspended from all trade on Thursday after the CSI300 tumbled more than 7 percent in early trade, triggering the market’s circuit breaker for a second time this week.
That drop-kicked stock markets across Asia, which were already wallowing after a weaker open amid concerns over China’s swooning currency and economic slowdown as well as falling oil prices.
On the mainland, the Shanghai Composite had tumbled 7.32 percent by at the time of the halt, while the Shenzhen Composite plummeted 8.34 percent. The CSI300, the benchmark index against which China’s new circuit breakers are set, plunged 7.21 percent. If that index rises or falls 5 percent, the market halts all trade for 15 minutes. If it subsequently falls by 7 percent, trading is suspended for the rest of the day.
In total Thursday, China shares only traded around 15 minutes.
Jackson Wong, associate director at Huarong International Securities said he was not surprised by how quickly the first trade halt came. He attributed it to the mentality of Chinese investors. If the index is down “close to 4 percent, the selling price will be heavier,” he told CNBC’s “Asia Squawk Box“. “It hit 5 percent in no time.”
Wong added that officials in China do not appear to have a good grasp of the market, even with the introduction of the circuit breakers, which is waning investor confidence.
Understand that the Chinese markets are a far better barometer of the Chinese economy than the Dow is of the American economy. China is not an economy driven by entrepreneurs and startups like America has traditionally been; it’s driven by the huge and largely state-controlled (or at least party-controlled) companies traded on those exchanges. So when the CSI300 collapses and the government has to shut down trading to stave off a full-scale rout, it’s a good indication that the party is over.
With that implosion comes the proof that Ludwig von Mises and Friedrich Hayek, the founders of what we call Austrian economics that you hear a lot about from folks in the precious metals business, Ron Paul, Peter Schiff and others, were right – that government intervention in the economy causes ruin because government bureaucrats and masterminds simply don’t have enough information or the competence to process it, and are driven by considerations other than sound financial analysis, in order to make good investment decisions.
Specifically, Hayek said “the problem was that under central planning, there was no economic calculation–no way to make a rational decision to put this resource here or buy that good there, because there was no price system to weigh the alternatives.”
The Chinese economy is nothing but central planning with a profit motive – which boiled down to reality means what drives China’s economic policies is graft and corruption. Most of the major business decisions are dictated by the whims of government masterminds, whose permission is necessary to get any investments made or large transactions done. There is no real economic freedom there. And as such, what gets built in China is what pays off the masterminds and their allies – not what actually makes money or creates prosperity.
Google “China Ghost Cities” if you want examples of what they’ve done. You’ll find a number of links like this one. They built entire cities, with housing for a half-million people or more, shopping malls and stadiums, etc., in the middle of nowhere all over the country with no discernible demand, and the entire investments in lots of these places were wasted. Couple that with uneconomic and damaging boondoggles like their high-speed rail system that nobody but Communist Party apparatchiks ride, the Three Gorges Dam, the crazy Olympic facilities in Beijing, and so on, and what you see is an economy which has squandered its investment capital on uneconomic investments and whose collapse was inevitable.
There ought to be a universal understanding that this is a cautionary tale for would-be socialist masterminds in this country, but it won’t be. They’ll insist on the same stupid mistakes the Chinese have made.
Meanwhile, when the Dow Jones takes a bath on Thursday as fallout from the Chinese market collapse, the rest of us will know that government intrusion into market economics always comes at a crushing cost to prosperity.