Everything you’ve heard about China’s stock market crash is wrong
http://qz.com/486476/everything-youve-heard-about-chinas-stock-market-crash-is-wrong/
This weeks Chinese stock market implosion has been widely viewed as a reaction to the Chinese governments devaluing the yuan on Aug. 11a move many presume was a frenzied bid to lower export prices and strengthen the economy.
This interpretation doesnt stand up to scrutiny. First, Chinese investors havent been investing based on how the economy is doing, but rather, based on what they think the government will do to prop up the market. The crash, termed Black Monday, was more likely a reaction to the central banks failure over the weekend to announce a widely expected cut to the bank reserve requirement since previous cuts in the last few months had boosted stock prices. The government eventually caved and announced a cut on Tuesday (Aug. 25).
Second, the crash happened nearly two weeks after the devaluation, and the government only let the yuan depreciate by about 3% before swooping in and propping up its value againwhich hardly helps exporters since the currencys value rose by some 14% last year.
The devaluation probably had more to do with breaking the yuans tightly managed peg to the US dollar, an obligation that has been draining the economy of scarce liquidity as capital outflows swell.
Both movesthe government pulling back from its market bailout and the currency devaluationstem from the same ominous problem: Chinas leaders are scrambling to find the money to keep its economy running. To understand the broader forces that led to this predicament, heres a chart-based explainer tracing its origins: