China's stock market crash, explained

Discussion in 'China' started by Srinivas_K, Jul 8, 2015.

  1. Srinivas_K

    Srinivas_K Senior Member Senior Member

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    China's stock market crash, explained

    China's stock market has been plunging over the past month, and the Chinese government is panicking. Over the past week it has employed a number of extraordinary measures to try to halt the market's slide, to little effect. On Wednesday, the benchmark Shanghai Composite index fell another 5.9 percent, bringing the market's total losses to 32 percent in less than a month.

    The question is whether the plunge is just an ordinary correction after a year of big gains, or if it's the first sign of deeper problems in the Chinese economy. Chinese stocks surged last year, but those gains didn't reflect broader economic gains. Rather, they were a result of more and more people investing in the stock market with borrowed funds. That has created instability and a danger that many investors will suffer outsize losses as the market falls.

    Investing borrowed money used to be heavily restricted in China, but the authorities have gradually loosened the regulations since 2010. Over the same period, Chinese people found increasingly creative ways to evade these rules. The last month's stock market declines follow efforts by Chinese authorities to rein in this kind of speculative investment. But in the past week the government reversed course and began trying to boost stock prices again.

    China's current predicament bears some resemblance to the situation in the United States in 2007. Risky, poorly regulated financial investments have proliferated in China, creating the danger of a meltdown that spreads beyond the stock market to the broader Chinese economy. Yet China's stock market isn't as big, relative to the Chinese economy, as in developed countries, so the panic might not spread to the economy as a whole.

    Investors used borrowed funds to push up stock prices
    The Shanghai Composite index fell 5.9 percent on Tuesday to 3,507. That's down 32 percent from the June 12 high of 5,166. Still, the Shanghai Composite index is 70 percent above its level a year ago, when China's most recent stock market boom began.

    The latest boom in China's stock market is different from one that came before it. The earlier boom from 2005 to 2007 coincided with rapid growth of the Chinese economy; when the Chinese economy slowed in 2008, the stock market plunged along with it:

    [​IMG]

    (MarketWatch)

    It's not surprising to see stocks go up in good economic times and down during economic downturns. But that's not what happened in the latest boom. The stock market rise that began in mid-2014 coincided with economic growth that was slowing.

    A big reason for the stock market rally was that a lot more people started buying stocks with borrowed money. This practice, known as "trading on margin," used to be strictly regulated by the Chinese government. But as the Financial Times explains, Chinese authorities have gradually relaxed these requirements over the past five years.

    The new rules still included an important safeguard, though: a 2-to-1 margin requirement said that only half of invested funds could be borrowed. The investor needed to put up the rest of the funds herself. There were also restrictions on which stocks you could buy and how long the money could be borrowed — rules designed to prevent speculative mania from getting out of hand.

    People also found a number of creative ways (detailed in a helpful May report from Credit Suisse) to evade these requirements. As a result, many people have been able to make even riskier bets than the official rules allow.

    So borrowed money flooded into the Chinese stock market between June 2014 and June 2015, helping to push stock prices up 150 percent. During this period, the amount of officially sanctioned margin trading in the Chinese stock market ballooned from 403 billion yuan to 2.2 trillion yuan. And that figure doesn't take into account the vast sums invested through back-door methods.

    http://www.vox.com/2015/7/8/8908765/chinas-stock-market-crash-explained

    Almost 3 Trillion are lost in the stock market because of the fall, Close to 90 Million middle class are affected by this crash. This is mainly due to lack of knowledge of the chinese middle class while investing in stock markets.

    China is trying to move from a manufacturing based economy to consumption based . This event is a blow to Chinese economic plan.
     
    Last edited: Jul 8, 2015
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  3. ezsasa

    ezsasa Senior Member Senior Member

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    It's just market correction, so far no indications that this will have an impact on global economics. To my understanding exposure of foreign institutional investors to Chinese stock market is very limited, so no worries.
     
  4. Srinivas_K

    Srinivas_K Senior Member Senior Member

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    The middle class of China are affected, China limits the foreign investments. Australia and other countries who supply raw materials to China will experience slow down.
     
  5. aliyah

    aliyah Regular Member

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    there is real estate bubble burst in china.thats y chinese govt announcing bigger,biggest infrastructure projects to some how support construction firms. this bubble burst will affect construction firms, steel,cement firms and banks . thats y Chinese govt putting full efforts to push stock market.where eles did u saw govt trying to support stock market. nowhere.but they doing it coz they fear if it get intense the whole Chinese economy will be in danger
     
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  6. Hari Sud

    Hari Sud Senior Member Senior Member

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    I am glad, that high cash splurge in China has caught up with the nuts and bolts economy.

    My question is how is this event going to affect the Chinese exports?

    This short of trouble in China. Is it going to benefit India.
     
  7. no smoking

    no smoking Senior Member Senior Member

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    It is not the first time they were affected and it won't be the last time.

    This trend already started since last year. It has nothing to do with stock market.
     
  8. avknight1408

    avknight1408 Regular Member

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    That is the scary part. China has a oversupply of everything. They have built hundreds of 'Ghost cities'. Practically they built new cities the size of Pune and nobody lives in them. http://www.cbsnews.com/news/china-real-estate-bubble-lesley-stahl-60-minutes.
    They built thousands of kms of bullet trains which are operating at heavy loss. They have debt $28 trillion which is 282% of their gdp. If china crashes, whole world will be affected.
     
  9. Screambowl

    Screambowl Senior Member Senior Member

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    China’s stock market meltdown triggers panic on Dalal Street; India could emerge stronger, say analysts

    [​IMG]

    MUMBAI: China's seemingly inexorable stock market meltdown — shares plummeted to a three-month low prompting sweeping government intervention — saw Indian equities take a beating on Wednesday along with other Asian bourses. But the panic in Mumbai was an over-reaction, said analysts and traders, arguing that India has a good chance of emerging as one of the few viable alternative investment destinations.

    On top of that, falling commodity prices will bolster corporate and government finances. That, however, wasn't enough to brighten sentiment on the day as the China syndrome gripped markets, pushing concerns over Greece to the fringes. The BSE Sensex fell the most in a month, led by metal and automobile stocks, amid worries over demand slumping. Vedanta

    and Tata MotorsBSE -6.17 % were among the worst hit — the first is India's biggest copper producer and the second is dependent on a unit that sells a lot of cars in China.

    The Sensex fell 1.72% to close at 27,687 points. The NSE Nifty declined 1.74% to end at 8,363 points, still above the crucial support level of 8,350. The crash followed the Sensex having risen about 7% from June lows. Vedanta fell 7.85% to Rs 146.10, its lowest in about two years.


    Aluminium producer Hindalco fell 5.1% to Rs 101.75, while Tata SteelBSE -4.72 % dropped 4.7% to Rs 283.40. The S&P BSE Metal index slumped 3.9%. Tata Motors dropped 6.2%, the most in more than a year, to Rs 405.15. The company gets a substantial proportion of its earnings from the Jaguar Land Rover unit, which makes cars that sell well in China. The NSE India VIX volatility index rose 9% to 17.8, reflecting the mood across the global equity markets. But that kind of nervousness may not be justified, suggested Nilesh Shah, managing director at Kotak AMC.

    "The sharp correction in Chinese markets may actually benefit India going ahead," said Shah. "Declining commodity prices will boost earnings (and) global funds may soon realise that it's better to have an India presence than in China, thereby boosting our equity markets, while the US Federal Reserve may consider delaying its interest rate hike amid global turmoil in China and Greece."

    He said domestic factors are likely to be of greater relevance to the Indian markets than external disturbances such as the Greek crisis and the Chinese equity market slump. The progress of the monsoon in July, the ability of the government to push reforms through in the forthcoming session of Parliament and a possible improvement in earnings will be closely watched by investors and will drive markets, Shah said.

    The Nifty closed below the crucial 200-day moving average of 8,375, which often triggers stop losses for investors with trading positions. Analysts said if it drops further and remains below the crucial support level of 8,350, then the index might see a further decline in the near term. Otherwise markets may consolidate at current levels.

    India's markets aren't too closely connected to fortunes in China or Greece, said Motilal Oswal, chairman and managing director of the financial servi ..

    Read more at:
    http://economictimes.indiatimes.com...ofinterest&utm_medium=text&utm_campaign=cppst
     
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  10. aliyah

    aliyah Regular Member

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    indian markets are falling on domestic issues. as bad monsoon, govt inability to pass key reform bills like land,gst,etc
     
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  11. Rowdy

    Rowdy Co ja kurwa czytam! Senior Member

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    30 chars of laughter ....................... :doh:
     
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  12. tomblues007

    tomblues007 Regular Member

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    chinese govt stop the crash,even though ,idon't know wether it's good,but i think it has send a message to market that the govt control the financial market! that's so bad for it's future development.
     
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  13. The enlightened

    The enlightened Regular Member

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    IF they quickly re-allow trading of suspended stocks them it might actually send a positive message and maybe others will copy them.
     
  14. no smoking

    no smoking Senior Member Senior Member

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    So, you think a "wall street" kind of financial market controlling govt is good for future development?
     
  15. tomblues007

    tomblues007 Regular Member

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    of course not.now china also has a "wall street "kind of financial market and the big captial kind of control the market.also has great influence to govt.
    i mean a financial market should be equitable ,fair,transparent.what govt do is maintian this.
    in china ,govt control financial market and it also is a market participant. we all know govt can't be player also judge.the duty of govt is to protect market not to disturb market.
    but in fact,what china govt did save the share market,because china's share market is not perfect,it is outdated.
    i don't konw whether it's good ,because investers get a massage from govt that govt policy is important than the market demmends.investers will underestimate the risk,it can't be a rational market,it will be a crazy market.
    financial market can't intervention policy to benefit themself either.wall street is full of greed and selfish.the bad thing is financial capital kidnapped govt.
    you may say domocracy has weakness,i think human society has weakness is a better state.
    so how to guarantee financial captical can't control govt .i don't know,it's about politics ,nation,social culture,system,justice,equity.it't about human society ,but i think it's not democracy's fault and democracy is always the best way.
    human civiliazation is always moving forward with new problem coming up .
     
  16. jamesvaikom

    jamesvaikom Regular Member

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    Middle class people don't have any choice. Investment in real estate is bad due to increase in ghost cities. Bank interests are very low. So many middle class people put money in stock market during last phase of bull run. Most people put money when goes up. They don't know about the real value of those stocks because their media will only share bullish view about their economy. In last 1 year many loss making companies reduced debts through equity dilution while many retail investors took debt to invest in stock markets.
     
  17. no smoking

    no smoking Senior Member Senior Member

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    The difference is Chinese wall street kind of organization is controlled by government while American wall street controls their government. Considering China's current situation, I prefer Chinese model.

    In the foreseeable future, Chinese private capital will still be quite weaker comparing to the west. If Chinese govt doesn't act as a player, what makes you think that Chinese capital can survive in a "free" market against those big shacks? You may say regulation, but you know the last thing West lacks is --- lawyer.

    By the way, US gvrt has been playing as the player and judge of financial market for a quite long time.

    No, the message sent is "nobody can put his or her own profit above China as a whole". China's share market is not outdated but primitive. It is still in its childhood.


    So, you know it doesn't work well in "free" market with a democratic system, and we know under current circumstance of China, the consequence of this faulty combination could be worse. Should we still follow a route which we are doomed to lose or chose to exploit a new road which may have a possibility of success?
     
  18. tomblues007

    tomblues007 Regular Member

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    yeah.it send a lot message.
    chinese wall street include some red capital and some private capital that primitive accumulate by the relationship with govt and some free capital.the red capital is relative smaller.that doesn't mean govt can control them.they always break the law.and local govt always too.sometimes central govt too.
    if govt can control them why in the share market minority shareholder and personal shareholder are always sheep,and why these capital bubbled so fast in product market ,they benefit so much with violent and digraceful way. but people's income growth rate are slower. maybe American govt has better contral. in any contury private capital has complicated relationship with govt.they can infuenced by each other.central govt and local govt are not always in the same line.things are complicated ,laws are not good enough ,it can't say so simply.appreantly American model is relatively better everthough not perfect.
    because financial market is Restrictive opening.
     
  19. tomblues007

    tomblues007 Regular Member

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    maybe as a player US govt is not greedy than Chinese govt.
     
  20. tomblues007

    tomblues007 Regular Member

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    i don't see exactly what do you mean.but i konw in wall street capitals are not eaquity,information asymmetry but better than china.a
    and i dare say no matter what market it is ,no mater what kind economy it is ,no matter what system it is ,democracy is the fundation.
    a free market means justice and equity and transparent and so on .if we say free is wrong ,because it is not free .
    i don't mean free market combined with democracy is not good .it is not good because it is not perfect.because they are fundation of society and economy.what we should do is to perfect the system .and human is always trying to moving forward.
    maybe some day we wil find some other economic form.but now i even can't see it's shadow.
    maybe in the furure ,with the development of big data technology,the society and the economy can be quantitied and percepted so accurate.then maybe it will be a different picture.
     
  21. Compersion

    Compersion Senior Member Senior Member

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    "China's largest oil company, PetroChina, was briefly worth $1 trillion after it listed on the Shanghai stock exchange in 2007, but only based on its price on that exchange. Its shares also trade in Hong Kong and on the New York Stock Exchange. Based on trading there, its market capitalization has never reached $500 billion."

    http://finance.yahoo.com/news/apple-market-value-hits-600b-151007997.html

    it is not that simple ... a financial stock market is much more advanced and has many variables. price of a stock is not a simple measurement determined by [x] today. there are many condition to a price

    The PRC and Hong Kong stock exchange (and to a minor effect NYSE) have a relationship. The latter(s) are more efficient and transparent for obvious reasons and preferred destination for investors.

    The PRC has political and domestic inclinations in stock market. A example of this was to allow large(r) number of stock accounts to be opened by individuals and allow trading with margin instruments at a time when the market was ascending rapidly and linked to political and some say hong kong announcements. The timing of it was critical (when there was no rapid movement up). The stock market was being used like a tool in political exchange.

    it would be wise if the PRC government instead of looking and worrying about short-term look at making the market more transparent and efficient. the potential and use of stock exchange benefits exponentially when done in a proper manner.

    for one all the stocks that are under suspension it would be radical but the PRC government ought to not allow them to list again but what to do with the investors and their money !! the number of suspended companies was massive (1000+). there is a certain qualification to have a company to be listed on stock exchange.

    but again a spanner in the works is the use of "large" numbers. large number of traders, money and market capitalization. one can argue that is the strength of PRC stock market and that is why PetroChina got a 1 Trillion valuation near its listing. It is why Indian companies go to USA and list ADR and get more money because the market can "afford it".

    There is no shame if the PRC market has money !!

    this might be a silly (but most easy to understand) example but look at a steve jobs led company vs a john sculley led company ... look at the share price and performance and valuations (notice little government intervention)
     

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