Wednesday, July 8, 2015

China Merits Our Attention! Greece Is On Hold

China Stocks Crash
Even as China's stock markets are in a free-fall the eyes of the world are fixed on Greece. On the Shanghai exchange, 365 companies suspended trading, equivalent to 33 percent of all listings. A further 992 were halted in Shenzhen, or 56 percent of the total. This sell-off has overwhelmed all government efforts so far to restore confidence. Chinese stocks plunged rapidly out of the gate on yesterdays open, with the Shanghai Composite Index falling another 7% then extending the loss to 8.2%, before recovering slightly to 4.8%. The sell-off came despite a rare pledge by the People's Bank of China near opening that it would closely watch stock movements and continue to use multiple ways to support the state-backed margin-finance entity in order to safeguard the stability of the markets and "hold the line against systemic and regional financial risks."

Bloomberg reported the situation to be even more troubling, one guest claimed that investors trying to sell Chinese shares have found themselves locked out of 72 percent of the market. This is because currently at least 1,331 companies have halted trading on mainland exchanges, freezing $2.6 trillion of shares, or about 40 percent of the country’s market capitalization. Another 747 fell by the 10 percent daily limit on Wednesday, making it impossible to find buyers at the prevailing price. Investors stuck in their positions are being forced to turn elsewhere to raise cash and this only fueled the panic and resulted in the biggest drop in a month in Chinese government bonds. It has also sent Hong Kong’s Hang Seng Index to a 5.8 percent tumble. “They’re going all out in trying to stop stocks from falling but it’s not working.” said Tsutomu Yamada, a market analyst at Securities Co. in Tokyo.

Over the last several weeks both the Shanghai Composite and Shenzhen Composite have plunged about 30% from their highs due to concerns that Chinese stocks are in a bubble. Investors and traders who leaped into Chinese shares over the past year, causing Shanghai to rise 150% and other markets to catapult even higher now face margin calls on their highly leveraged positions and are faced with selling head over heals. This comes despite government efforts to halt the fall. Both investors and analysts debate whether and how the government should intervene. Those supporting a bailout argue that China is nearing a financial crisis if it lets the rout continue and that the government must avoid the problems created in America when the U.S. government did not act fast enough to prevent the bankruptcy of Lehman Brothers.

Still we find the crux of world focus locked on a Euro-zone that continues a several year talkaton and is still busy wrangling over the issue of Greek default. Considering the collapse of its stock market it would seem the world should be much more worried about the economic chaos going on in China, remember the country has about 1.4 billion people and the world's second largest GDP. A rapidly sinking stock market is often a sign of an economy in turmoil as we saw during the dot-com bust in 2000 and again in 2008. Many people point to the fact recent exuberance for Chinese stocks isn't backed up by fundamentals and that the rise over the last year appears driven by continued government borrowings and manipulations. In this scenario, investing becomes gambling on the government’s actions.

It is important to note that while some risk of contagion exist from what is happening in China the real impact may not be felt for some time. A few of the factors that play into this are things like foreigners own just about 1.5% of Chinese shares, this may insulate outsiders from a direct hit, but increases the potential that stock market losses will ripple through the Chinese economy. It has been noted that a lot of new traders have flooded into the stock market in China over the last several months and many are investing borrowed money that has been leveraged on margin, this means the pain will be great and could impact the economy in a big way going forward. We know it is not the poorest workers involved, but those higher up the consumer chain. this could translate into a much slower economy going forward.

In a healthy market, investors make independent decisions about whether or not to buy or sell a stock. But in the China A-share market, government intervention has disturbed the price-discovery process because it unifies investor expectations and encourages them to make the same choice. This means investors are less concerned on mark to market value and driven by when they think the government will step in and how much extra liquidity will be available. The loud voices of those wanting more support for the market from the government of China have been so loud that it is difficult for regulators to ignore them. A series of measures have been implemented to shore up investor confidence, but as of now they have been unable to stem the tide. This adds credence to the idea that only in the case of systemic risk that threatens financial stability should any government step in and that bailouts be considered only as a last resort during the most dire of times.

 Footnote;  As always comments are welcome and encouraged. This article goes hand in hand with another article that focuses on the giant credit crunch and overbuilding that threatens the economy of china. You can find that article below.


  1. See Ann Stevenson Yang's video "Has China's Hard Landing Already Arrived"
    (Feb 2015) A major indictment of the CCP predicting the crash

    My comment: China needs to retire the CCP


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