Globe spooked by China's panda bear market: Don Pittis

The symbol of a crashing market is the raging bear, teeth snapping, claws slashing.

When the Chinese stock market began to crash this week, global traders at first thought they were running from that dangerous kind of bear. They began a selling frenzy.

Toronto's TSX plunged more than 700 points. New York's Dow Jones industrial average fell 1,000 points.

• TSX & Dow bounce back after China cuts rates
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Only later did traders sheepishly realize the Shanghai shakeout wasn't a real bear. Instead, it was more like a caged Chinese panda, a vegetarian that feeds on government-issue bamboo shoots. And a baby at that. 

That is not to underplay the impact of the sagging Chinese economy on Canada's resource sector. That is real, and until we see more signs of Canada's much anticipated industrial reboot, the country's stock index will likely remain weak.

Taking fright

For individuals who had their life savings invested in Chinese stocks, the losses were horrifying. It would be like losing five years worth of interest on your government bond portfolio in a single day.

But in many ways the outsize reaction to the panda's growl said far more about the state of markets in the developed world than it said about the Chinese economy.

The great fall of China

9 years ago

Duration 2:15

Chinese and Japanese stocks fall for a fourth day, hitting an 8-month low but other markets have shrugged off the bad news from the east

The fact is young markets like China's, where a large fraction of investors are inexperienced amateurs, are notoriously volatile.

European markets faced much worse wobbles before they learned their way. Tulip Mania and the South Sea Bubble are notorious examples of panics when investor didn't know their business. New York's crash of 1929 was partly blamed on amateurs taking a flyer and then taking fright.

We now think of the Hong Kong market as being an established elder brother to Shanghai, run by professionals, largely for professional investors. But in its younger days in the 1980s the Hong Kong Stock Exchange had to close for four days in the face of panic. That trial by fire forced it into a new sophistication.

Urgent measures

In Shanghai, a shaky market may be read as one more symptom of a struggling Chinese economy.

• Desperate move by China a worrying sign

To the wider world the Chinese market's gains and their subsequent losses are almost immaterial.

The mostly government-controlled companies listed on the market are unlikely to go broke no matter what their share price. They will keep operating. The Chinese financial system is still not deeply integrated into that of the developed world. 

But the lesson Chinese investors are learning as the market takes its baby steps is one that traders in the developed world would be wise to recall — that markets are not cash machines where you get lucrative weekly payouts as stocks go up and up.

Risk, reward

The purpose of a share market is for entrepreneurs to raise capital by letting people share in the rewards. But those investors must also share in the risk.

Dumping huge amounts of Chinese government money first into the economy, then into the stock market in a desperate attempt to keep it high was a futile attempt to keep risk out of the equation. It is incompatible with the market's true purpose.

At least China, being inexperienced with markets, has an excuse.

Developed world markets have not been following the rules for a while, and everyone knows it. And that is why they're so nervous. Since the crisis of 2008 central banks been knowingly keeping a market bubble alive with low interest rates. 

• The perils of a recovering U.S. economy

But as with China, artificially keeping markets high damages the productive dynamic of the stock market system. Who would want to put their cash into a long-term risky venture when share buy-backs and government guarantees offer safe and repeated short-term market gains?   

China’s bubble economy

9 years ago

Duration 1:55

Bonnie Allen reports on victims of China’s market meltdown

Developed world traders are hoping the U.S. and Europe kick into growth in time to spare the world a serious market crash. But they're just not sure it will happen.

So far Beijing, like other governments, has been seeking the magic formula to relaunch its economy without short-term pain.

China's latest plan, to require the country's pension funds to take a long-term stake in the market, might turn out to be a better idea because, if left to their own devices, stocks generally provide good long-term returns.

The involvement of pension funds will also help transform China's young market from one governed by nervous amateurs into a place for professional investors. 

Eventually China and the rest of the world will get back to real growth. 

That means professional investors must wait for their gains. And baby markets must grow up.

Follow Don on Twitter @don_pittis

​More analysis by Don Pittis