Wednesday, July 15, 2015

Ground Zero'- China's Stock Market Crash Up Close in Shanghai

Ground Zero
China Facing Plunging Stock Market

For years the Chinese Communist Party has been capable of keeping control on democracy disputes, protestors, the legal system as well as the military. However it has now been facing a more headstrong opponent in the form of a plunging stock market. Fast paced and invisible defiant market forces have confronted the efforts of the party led government in arresting the month long slide in Chinese stock market and if the same tends to continue, the fall in stock prices could slow the economy as well as weaken the faith in the party’s leadership and power, according to experts on China and economics.

 Three months back the state run People’s Daily had spoken that the increased stock prices were the `carriers of the China Dream’ and the confirmation of President Xi Jinping’s signature vision for what he calls, the great rejuvenation of the Chinese nation. However, what had been addressed as a bull market turned out to be a bubble burst. The main share index of Shanghai is down a third since its peak of June and trading in almost three quarters of listed shares were frozen due to limit declines or completely suspended and the securities regulators were also speaking on a mood of `panic’.

Stock Collapse – Reveals Impromptu Policy Makers

Since the stock market collapsed, the Chinese authorities instructed brokerages as well as insurers to buy, barred insiders from selling, tapping the nations’ sovereign wealth to pile up shares. Moreover, the government also raised patriotism blaming foreigners and arrested rumour mongers.

The Chinese stock collapse has been` a total revelation of how impromptu the policy makers could be in managing the transition to market-driven capital markets and that’s the question of the moment’ comments Daniel Rosen, a partner at the rhodium Group, which is a New York based economic advisory firm. He further adds, that `the question for tomorrow is whether that immaturity applies to their ability to regulate other aspects for the economic transition as well’.

Wary at the prospect of further losses, the Chinese government has taken action by agreeing to establish fund worth 120 billion yuan - $19.4 billion in purchasing shares in the largest companies that were listed in the index. Besides Beijing has also reduced the interest rates, relaxed restriction on the purchase of stocks with borrowed money as well as imposed a moratorium on initial public offerings.

Boom Powered by Retail Supporters

According to Financial Times, the recent dip in the Chinese stock market trailed an extraordinary bull period wherein the Shanghai composite increased by 149 percent through June 12 and the boom was powered by retail supporters who had been new to investing where more than 12 million new accounts had been opened on the stock exchange in May alone. Once controlled by the elites, the stock market progressively has now become a vehicle for China’s developing middle class.

Two thirds of the households who had opened accounts in the first quarter of 2015 had not even finished high school and the Equity market passion had spread to China’s universities, where 31% of the college students of the country had invested in stock, three quarters of which had used money that had been provided by their parents. Chinese have generally put their excess savings in housing, in recent years, however the uneven performance of real estate has prompted their interest in other direction for domestic investments.

Due to strict capital controls it has been very difficult for most of them to move money out of the country and more have turned to stock market. As per Bloomberg, more than 90 million people in China is said to have invested in equities, which is greater than the total membership in the Chinese Communist Party. The recent fall in prices has affected the fortunes of a huge number of people. Should this be a cause of worry for those outside China? Perhaps not.
China Stock Markets – Isolated

China’s stock markets are quite isolated due to a heavily combined global economy which is now the world’s second largest. Foreign investors tend to hold only 2% of all equities of China where equities account for around 5% of the overall financing. The aggregate bank deposits of China are around $2.1 trillion, providing a buffer against huge market fluctuations.

Moreover, the long bulls run which led the June’s collapse had not faded totally and the Shanghai composite is yet up by 20% since January 1. Nonetheless, these types of volatility in the world’s second largest equity market props up questions about the overall health on the economy of China. The GDP increased by 7% during the first quarter of 2015, which was its weakest mark in six years, while stimulus measures implemented by the government is yet to reverse this slide. As per Chief Economist at Deloitte, Ira Kalish, `China’s slowdown already had consequences beyond its borders’.

He has written in ChinaFile that `already the halving of China’s growth has wreaked havoc with global commodity markets and has negatively influenced growth in those East Asian economies that are a vital part of China’s manufacturing supply chain. It could be argued that the imbalances in China’s economy thus represent more of a risk to the global economy than the current and much discussed situation in Greece.


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