What effect do foreign crises have on SE Asia? Part 1


By 1911, The Great Lafayette was such a renowned illusionist that when an oriental lantern from the set caught fire during a performance, the audience thought it was part of the act. In fact the fire destroyed the stage and killed Lafayette along with two of his assistants.1

In recent weeks, it has seemed to me that an illusionary trick has been taking place. Whilst everyone was concentrating on events in Athens and Frankfurt, the Chinese stock market was crashing before our eyes.

A global shock

For a 3-week period in late June and early July, the Shanghai and Shenzhen stock exchanges plummeted with share values dropping by a third. Whilst few foreign investors were directly exposed to these markets2 – only 1.5% of Chinese shares are owned by foreigners – it is impacting the global economy. After all, China is the world’s second largest economy: some 2¼ times greater than third-placed Japan. Added to that, it’s also first-placed USA’s main export and import partner, representing 7.6% of America’s export market and just under 20% of its imports.3

This had been coming: as I pointed out in an Update in June,4 China has long appeared to be on the way towards Japanese-style debt deflation (see chart), as the government attempts to artificially boost demand by making borrowing cheaper for the debt-addicted private sector.

In fact, the stock market crash wasn’t as rapid as it may have appeared. Between 12th July 2012 and 9th July 2015, the two Chinese markets lost an estimated USD 3.25 trillion in value.5 Put into context, the Greek state owes international creditors around USD 237 billion6 – some 12 times less (although of course it’s not so much Greece’s debt per se that has ever concerned me, so much as the wider ramifications of the failure of the inane self-serving Euro project).

Cede or impose control: it makes little difference

I’ve felt for a while that ASEAN currencies are susceptible in any kind of global economic, liquidity or capital market crisis; such as those that are very much on the horizon, despite short term attempts to kick cans further down respective roads, in China and Greece.

While a politicians’ compromise may have been reached to keep Greece in the Eurozone for now, I wouldn’t rule out a return to the Drachma in the not-so-distant future. A full-blown Euro exit would exert further downward pressure on Southeast Asian currencies, as any flight to safety by investors would favour the US Dollar. We appear to have returned to the situation I previously outlined, where the world is in a risk-on pro-Dollar/risk-off pro-Euro et al cycle. Beyond this, such discrimination as there is tends to favour those currencies with apparently attractive short-term prospects such as the Sterling, without looking at deeper fundamentals. Maybe the interest-rate-increase corner, into which we expect the Fed to have trapped themselves before the year end, will lead to some reappraisal of this.

In contrast to Greece’s total lack of control over economic policy,7 the Chinese government thinks it’s in complete charge. The government has gone all-out to limit the effects of the crash, cutting interest rates, halting scheduled IPOs, threatening to arrest short sellers and allowing speculators to use their houses as collateral for marginal loans.8 Whether this constitutes assistance or interference is a matter of debate. Word is that the government will keep throwing ever more kitchen sinks at the problem until the markets behave more the way it wants them to. However, what Beijing doesn’t seem to realise is that even with all that power to control markets, it is merely papering over the cracks. The fundamental problem that many governments – not only China – are failing to recognise is that private debt is so elevated as to pose an impediment to sustainable growth.9

To be continued…


1 http://www.scotsman.com/news/the-magician-

2 http://edition.cnn.com/2015/07/08/asia/china-stocks-explainer/

3 US Census Bureau

4 China flatters to deceive… and it’s a worrying deception,
MBMG IA Update, June 2015, http://www.mbmg-investment.com/in-the-media/inthemedia/49

5 ibid

6 http://www.reuters.com/article/2015/06/28/

7 Euro Summit SN 4070/15, 12th July 2015 http://www.telegraph.co.uk/

8 http://www.forbes.com/sites/jessecolombo/2015/07/19/

9 China flatters to deceive… and it’s a worrying deception, MBMG IA Update, June 2015,