Posted on Jul 12, 2015
If China's stock market crash is just beginning, what are the possible implications for the U.S. and world economies?
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Since the Shanghai Composite index dropped from a 52-week high around 5,178 on June 12, it’s been downhill all the way.
In just three weeks, stocks listed on mainland China’s most prominent exchange tumbled 30% from their seven-year highs. The even more speculative ChiNext Index has lost 42% of its value over 21 days.
Investors and traders who piled into Chinese shares over the past year, causing Shanghai to rise 150% and other markets to catapult even more dramatically, faced margin calls on their highly leveraged positions and started selling with both hands and both feet.
It was the biggest rout in this volatile market since 1992, and it prompted the Chinese government to take strong measures.
Last week, the Bank of China cut short-term interest rates for the fourth time this year. Regulators relaxed margin requirements and cracked down on short sellers, while state-run media tried to calm jittery investors with happy talk. That did little to stanch the hemorrhage.
Over this past weekend, government authorities and “private” Chinese brokerages and companies announced even more dramatic moves to prop up stocks:
• Brokerages and mutual-fund companies said they would buy billions of dollars’ worth of Shanghai shares.
• A state-owned investment firm said it would buy China-based ETFs.
• Twenty-eight companies said they would put planned initial public offerings on hold, as IPOs had been the focus of the most intense speculation.
• Regulators also increased the kinds of assets that can be used as collateral to buy stocks, to include — are you ready for this? — people’s homes. I’m not making this up.
The goal: Show retail investors that the all-powerful Chinese government had their backs and that the “Beijing Put” was alive and well.
Except it wasn’t. Shanghai opened up a strong 8.5% on Monday, despite Greece’s resounding “no” vote in Sunday’s referendum. But shares slipped throughout the trading day and closed up only 2.5%. On Tuesday, Shanghai slipped 1.3%, and on Wednesday plunged 5.9%.
That was a clear sign that the government had taken its best shot and failed. Which means that the most likely direction for Shanghai, Shenzhen and other mainland exchanges is down, down, down.
http://www.msn.com/en-us/money/inside-the-ticker/chinas-stock-market-crash-is-just-beginning/ar-AAcHnWG
In just three weeks, stocks listed on mainland China’s most prominent exchange tumbled 30% from their seven-year highs. The even more speculative ChiNext Index has lost 42% of its value over 21 days.
Investors and traders who piled into Chinese shares over the past year, causing Shanghai to rise 150% and other markets to catapult even more dramatically, faced margin calls on their highly leveraged positions and started selling with both hands and both feet.
It was the biggest rout in this volatile market since 1992, and it prompted the Chinese government to take strong measures.
Last week, the Bank of China cut short-term interest rates for the fourth time this year. Regulators relaxed margin requirements and cracked down on short sellers, while state-run media tried to calm jittery investors with happy talk. That did little to stanch the hemorrhage.
Over this past weekend, government authorities and “private” Chinese brokerages and companies announced even more dramatic moves to prop up stocks:
• Brokerages and mutual-fund companies said they would buy billions of dollars’ worth of Shanghai shares.
• A state-owned investment firm said it would buy China-based ETFs.
• Twenty-eight companies said they would put planned initial public offerings on hold, as IPOs had been the focus of the most intense speculation.
• Regulators also increased the kinds of assets that can be used as collateral to buy stocks, to include — are you ready for this? — people’s homes. I’m not making this up.
The goal: Show retail investors that the all-powerful Chinese government had their backs and that the “Beijing Put” was alive and well.
Except it wasn’t. Shanghai opened up a strong 8.5% on Monday, despite Greece’s resounding “no” vote in Sunday’s referendum. But shares slipped throughout the trading day and closed up only 2.5%. On Tuesday, Shanghai slipped 1.3%, and on Wednesday plunged 5.9%.
That was a clear sign that the government had taken its best shot and failed. Which means that the most likely direction for Shanghai, Shenzhen and other mainland exchanges is down, down, down.
http://www.msn.com/en-us/money/inside-the-ticker/chinas-stock-market-crash-is-just-beginning/ar-AAcHnWG
China
Stock Market
Economics
Posted >1 y ago
Responses: 4
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I think the greatest threat is actually to the Government of China. They realize this, hence banning margin trading. The problem really comes if the governments current intervention fails to work and over time everyone moves back a decade or two in economic terms. That would undermine Beijing's messaging that they can guide the country to prosperity. Regardless of what we in the west often think, I still believe China is focused on internal security and social harmony. This would undermine decades of economic growth under the "Communist to State Capitalist" system. That could cause a large amount of instability not just within China, but regionally and probably worldwide.
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Much of the decline is due to the ban on margin trading - short term investing where you buy stock with some portion up to 50% of the purchase by a loan using a margin account. In the US we have placed limits as to what securities qualify - mainly low risk type of securities. Reguardless margin trading is considered a risky from of investing as it investing with borrowed money with the security acting as the collateral. If the price of the securities falls the loan becomes over leveraged. This form of trading has become very popular in China but China being wise to the risk of an over leveraged financial systems (America's sub prime loan securities) they put a ban on this form of investment. Imagine a billion people not being able to cover their debt of their margin accounts. It would be bad for the banks as well on the stock market. While this is bad for China's banks and brokerage firms running the margin accounts Shanghai’s nosedive had little affect on other markets as the reasoning behind it is sound.
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No government can stand against the tide for long. Bubbles are going to pop.
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