Daily Archives: 7 July 2015

People’s Republic of China’s Stock Market Drop

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The PRC’s Shanghai Composite Index, which is an index of the stocks that trade on that country’s major stock exchange, the Shanghai Stock Exchange, has fallen by some 28% in the last week. This is the second time since 2007 that this index has fallen this far (in 2007 it dropped by roughly 2/3 over the course of 13 months beginning in October 2007). In response, the PRC has decided to close the market to IPOs until the central planners in Beijing decide conditions are suitable for IPOs.

This central planning foolishness got me wondering. How big a deal is the Shanghai Stock Exchange for the PRC’s economy?

The total value of the PRC’s stock market was around $4.2 trillion in 2014, per Bloomberg Business. The PRC’s Purchasing Power Parity GDP for 2014 was around $19 trillion. Thus, the value traded in its markets was roughly 22% of GDP.

In contrast, the dollar volume on the New York Stock Exchange last Thursday (2 Jul) was some $63.5 million. Expanding that (very naively) to a trading year of 220 days during which stocks are traded out of a 365-day year (weekends and holidays, after all), the annual dollar volume for the NYSE runs to a skosh under $14 trillion. The US PPP GDP for 2014 was $17.7 trillion. The value of the NYSE’s stock trading was a bit under 80% of our GDP.

It’s certainly true that 22% of GDP or the raw value of $4.2 trillion are hefty numbers. But at only 22%, the central planners, in addition to chasing chimeras with their assumption they actually can control in any significant degree any economy, are chasing a relatively minor chimera with their IPO moves. But, then, like central planners everywhere, they think they Know Better than mere investors. Even when the Know Betters are monstrously wrong.

Europe and Greece

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Peter Müller and René Pfister have a piece up in Spiegel Online International concerning German Chancellor Angela Merkel’s handling of Greek Prime Minister Alexis Tsipras and of the Greek financial crisis. Müller and Pfister’s central thesis is that Merkel has mishandled the situation, and rather apocryphally, they suggest that any resulting failure of the euro will be the fault of Merkel’s policy regarding Greece.

Müller and Pfister are operating from the false premise that, beyond Merkel’s supposed mishandling of Greece and of Greece itself, the euro is fundamentally sound.

This is false. If the euro fails, it will not be because of Merkel’s policy regarding the Greek problem (I won’t call it a crisis, since it’s that only for Greece, and not at all for the rest of the eurozone) didn’t work, or even because of Greek-eurozone mutual intransigence. Any failure of the euro will flow from its poor construction.

On what basis can anyone think that a currency cobbled together from nations with as radically differing philosophies regarding the purpose of money or the role of government in society as is extant between, say, a Greece and a Germany or a Netherlands would have any durability at all?

Europe would be far better off well into the intermediate and nearby distant future were it set up as three or four smaller currency unions, each with much more homogeneous philosophies, and those currency unions then operating within a pan-Europe free trade zone.