Forecasting a China Crisis

In January 2016, a panic that first erupted in China wiped away $8 trillion of value from global markets. But our clients were well prepared weeks ahead of time, and able to position themselves safely.

SITUATION

Global markets crashed in early January 2016, reacting to a frenzied sell-off in China, driven at the outset by “surprise” weakness in that month’s services PMI gauge. Globally, markets lost over $8 trillion that month.

PROBLEM

China’s economy deteriorated dramatically in late 2015, but most investors—with an eye on ever-stable official data—had little clue this was happening. In fact, sentiment was largely on the upswing, with investors increasingly comfortable that services sector strength (the “new” economy) would drive Chinese growth going forward.

However, when the services PMI hit a 17-month low in early January—on the heels of even deeper weakness in manufacturing—concerns over the economy exploded into an all-out market panic.

SOLUTION

While a correction in Chinese markets was justified, the frenzy that ensued over the following weeks could have been avoided if investors had better and earlier visibility into the economy’s key points of weakness.

China Beige Book had identified substantial services (and manufacturing) weakness many weeks earlier, trends that we alerted clients to immediately, along with their very troubling implications. While these developments went public in early January, our clients had over three weeks’ advance notice to position themselves safely.

RESULT

Risk off! Unlike many other China market panics, this was the real deal. Armed with CBB data showing the severity of the economic weakness, our clients positioned themselves defensively, sidestepping a global equities and commodities sell-off, as well as a more than 20% freefall in each of China’s main stock markets.

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