President Xi Jinping just months ago was hailed for China’s market rally, seeing its markets lead the world, allowing companies to earn billions of dollars and even seeing authorities acquire the ability to pay down the debts of unhealthy state companies.

 

Investors followed the cues of China’s rally, seeing massive equity gains across the United States, Europe, and Japan. Senior private bankers in Asia were citing China was their breadwinner, while Japan and Europe were used as safe-haven hedges just in case China experienced a downturn.

 

What investors little expected, and were least concerned about, was the havoc that would occur if China experienced a sharp downturn.

 

Investors were still stuck in the past of the 1997 Asian financial crisis, where China’s economic problems and burgeoning debt issues were contained domestically. Little did they know that in June 2015 when China’s markets slipped into a massive correction, Japan, South Korea, the Asean, Europe and even America – many of them once considered safe havens – would fall alongside the world’s second largest economy.

 

June 2015 was a real test for Xi Jinping and his administration. With him constantly saying that China will have a “soft landing” and that markets will play a “decisive role” in the economy, investors were positive when Chinese markets fell, he would be there to save the markets. And he sure tried.

 

Xi Jinping and his team realized that China is in a unique and special position in the world. Only a few economies are considered “super economies”. Realizing the importance of ensuring that the stock exchanges stay stable, not only for domestic investors, but also international investors, the People’s Bank of China did whatever it takes to save markets.

 

Extraordinary and unprecedented capital market controls were implemented by the central bank to tame share prices, retain domestic and international support from investors, and most importantly, continue to demonstrate Chinese government’s influence on the global economic system. Chinese shareholders were ordered to not sell shares, initial share sales were suspended, and government institutions began pumping billions of dollars into the market to buyback stocks, while short-term trading in some instances was also suspended.

 

In July to early August 2015, investors came to the realization that no matter how much Beijing tried to managed its markets, it did not have enough power to control international investors and their attitudes and behaviours towards the economy.

 

Kamel Mellahi, professor of strategic management, Warwick Business School tells The Asset that China’s actions have not been enough to calm international investors, and do not even address many of the main issues the economy is facing.

 

“The market is looking for some strong signs that China has enough ammunition and more importantly it is willing to use it effectively to weather this storm. The cut of interest rates by 0.25% and lowering the bank reserve requirement ratio by 0.5 % may calm the stock market turmoil, but does not address the underlying causes,” said Mellahi.

 

With investors losing hope in Beijing’s ability to prop China’s markets, bear markets emerged across Asia, with Hong Kong falling more than 20% in August since its peak in April, South Korea falling right behind it, along with Taiwan, Australia and many Asean countries. Even the United States, which has seen the dollar becoming a global haven for investors, has reacted to China’s tumbling markets, seeing the Dow Jones Industrial Average plummeting more than 500 points in August.

 

Even the slightest policy changes by China’s central bank impacts US share prices, which can be clearly seen yesterday when America’s stocks surge when the PBOC slashed interest rates, another emergency action aimed at calming global financial markets and boosting economic growth by bringing in cheap capital.

 

Japan, a once glorified haven due to the implementation of market reforms and the realization of Abenomics, has shown that its markets cannot withstand the fears of a weakening Chinese economy and relentless sell-off of Chinese shares. In June, July and August 2015, the Nikkei Topix has fallen significantly, demonstrating the extensivenss of Japanese companies' exposure to the Asian giant. "The ripple effect from the market correction (in China's economy) has yet to show up," writes Bank of America Merrill Lynch analysts in a note. "We expect slower growth, poorer corporate earnings, and a higher risk of a financial crisis."

 

Essential alternative safe heavens have also lost their status. Gold, once considered a hedge against global stocks, has seen its bottom drop out from $1,800 an ounce all the way down to below $1,200 per ounce, thanks in part to Chinese investors selling their gold to pay off their margin calls. Even “safe haven” currencies including the Swiss franc, has been shaping amongst China’s economic problems.

 

 

With China’s markets now virtually impacting all markets and assets across the globe, where can investors invest? Where is the safe heaven? Retail investors, wealth managers and private bankers are searching hard to find this to protect their assets from China’s recent volatility.

 

Shane Oliver, chief economist at AMP Capital, says that one of the best safe havens out there is in the Japanese yen and not necessary the stocks themselves.

“Typically, when there's turmoil in global financial markets, the yen tends to rise in value because Japan runs a current-account surplus and so it's got a lot of money invested around the world. So whenever uncertainty arises, the Japanese take their money back home."

 

Oliver says that the Europe may also be a good place to put assets. “Oddly enough, as long as the crisis isn't centred on Europe, the euro will also rise. Euro is also a region with a current-account surplus, so you tend to see a lot of money sucked in when there is a crisis.

Bart Melek, director of commodity strategy for TD Securities, recently cites that US Treasuries and the US dollar will preserve wealth during these volatile times.

 

“Some portion of a portfolio should always be invested in these assets, as a matter of wealth preservation,” says Melek. “Depending on what the volatility looks like and what the risks are out there.”