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China’s Stock Market Plunges
Topic Started: 27 Jun 2015, 11:54 AM (19,941 Views)
Mike
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http://www.nytimes.com/2015/06/27/business/international/chinese-stock-indexes-plunge.html?_r=0

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SHANGHAI — Share prices in China plunged on Friday in one of the sharpest sell-offs in years, accelerating a downturn this last week in what has been, for much of this year, the world’s best-performing stock market.

China’s two major market indexes fell in tandem. The Shanghai composite fell 7.4 percent on Friday. The Shenzhen composite fell even more, dropping 7.9 percent. Share prices in Hong Kong, which is regulated separately, also fell, by 1.8 percent.

Analysts had been warning for months about the risks of a stock market bubble in China, where giddy investors have driven up stock prices by purchasing shares on margin, or with money borrowed from brokers.

China’s market has been an anomaly. Even though the broader Chinese economy has been relatively weak, share prices of many Chinese-listed companies have skyrocketed in the last year. Many traded at record valuations, often 80, 90 or 100 times their projected earnings.

The high valuations have been a boon for listed companies and their major shareholders. The market boom has also helped encourage a wave of Chinese companies that had listed in the United States to arrange stock buyouts and delist with the intention of eventually relisting in China, where stock valuations are much higher.

In the last few months, some well-known Chinese companies have announced plans to buy back shares and delist from the Nasdaq and the New York Stock Exchange, including Wuxi Pharma Tech, HomeInn Hotels and Qihoo 360, the Internet services provider, whose management offered $9 billion in a buyout.

But China’s roaring stock market showed in the week just past how volatile prices can be: Shenzhen’s main index fell the previous week, then rose early last week, then tumbled again.

Authorities are moving to tighten rules on buying stock with borrowed money, which is believed to be one of the key drivers of a stock market rally that has sent share prices to seven-year highs.

The regulators are also trying to crack down on financing from unregulated sources, what analysts refer to as over-the-counter stock margin financing.

“This is what triggered the correction,” said Steven Sun, a Hong Kong-based analyst for HSBC. “Also, there have been controlling shareholders, significant shareholders and corporate management trying to cash out. They had been selling massively into the rally. And these are people in a better position to know the performance of their company.”

Many analysts say that the government props up the stock market as a policy move aimed at helping debt-burdened state-owned companies repair their balance sheets. A strong market also improves the financing of private entrepreneurs, which could help spur innovation.

But the government has been careful to warn about some of the risks, including the use of borrowed money, knowing that a sharp decline could hurt smaller investors.

Analysts at some major banks, including HSBC and Morgan Stanley, have been cautioning investors about the risks of the market, particularly after a big sell-off last month. Although stock prices are still up significantly from a year ago, with the Shanghai composite reaching 5,166.35, up as much as 160 percent in the last two years, there are signs that some of the most sought-after stocks are now in the doldrums.

The Shanghai composite is down about 18 percent from its June high. But in Shenzhen, the so-called ChiNext, a kind of Nasdaq-style board on the Shenzhen Stock Exchange for growth stocks, has dropped about 30 percent in the last several weeks, meaning it is already technically in a bear market.

The FTSE in London fell nearly 0.8 percent on Friday; while the German DAX closed up 0.2 percent and the CAC in France rose 0.4 percent. United States indexes were mixed: The Standard & Poor’s 500-stock index was flat, while the Dow Jones industrial average rose 0.3 percent and Nasdaq fell 0.6 percent.

Chi Lo, a senior economist covering greater China for BNP Paribas Investment Partners, said the Chinese government had promoted the growth of the stock market as a tool for financial reform, like reducing the economy’s reliance on bank lending. But he said the government grew concerned about margin lending, and that, combined with a steady stream of new companies listing their shares on the market, had led to a correction in prices.

“This is not a bad thing,” Mr. Lo said. “This is an opportunity for long-term investors to go back in. Many investors weren’t comfortable with those sky-high valuations.”


I warned of this awhile back. Forget Greece, forget the US. The Chinese stock market is the greatest threat to the world economy. If this bust accelerates, it will cripple the Chinese economy. The stock market bust will accelerate the housing market declines happening right now. It will further reduce GDP growth and destroy the savings of millions of small time Chinese investors. This could very well lead to Chinas first modern recession or worse.

Chinas main stock index is up 160% in 2 years, not accounting for recent falls. What happens if the market corrects and it loses 50% of its current valuation. How does this effect the Chinese economy. How does a centrally planned economy respond to such massive market forces.

On the plus side for Australia, we could see massive amounts of cash fleeing China and into Sydney property prices, further inflating that bubble. A plus at least for the short term. I say sell to the Chinese now at high prices and us Australians can buy it back when the market crashes just like we did to the Japanese in the early 1990's.
http://mike-globaleconomy.blogspot.com.au/
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Count du Monet
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Well if the figures are true, the peoples bank increased the amount of cash in circulation by 5.5% pa in the previous year. This is on par with the Basel system and a far cry from the 11% pa growth in cash of a decade ago.

However for this last year the cash in circulation has increased by only 1.7% pa.

Yes, if they keep this up speculation in local property, shares etc, will see investors looking at big losses.
The next trick of our glorious banks will be to charge us a fee for using net bank!!!
You are no longer customer, you are property!!!

Don't be SAUCY with me Bernaisse
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Terry
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Mike
27 Jun 2015, 11:54 AM


On the plus side for Australia, we could see massive amounts of cash fleeing China and into Sydney property prices, further inflating that bubble. A plus at least for the short term. I say sell to the Chinese now at high prices and us Australians can buy it back when the market crashes just like we did to the Japanese in the early 1990's.
Oh great. Let's behave like 2-bit street hustlers in the hope of making a quick buck while ignoring the implications of financial instability caused by massive shifts in capital flight.
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Chris
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Count du Monet
27 Jun 2015, 12:06 PM
Well if the figures are true, the peoples bank increased the amount of cash in circulation by 5.5% pa in the previous year. This is on par with the Basel system and a far cry from the 11% pa growth in cash of a decade ago.

However for this last year the cash in circulation has increased by only 1.7% pa.

Yes, if they keep this up speculation in local property, shares etc, will see investors looking at big losses.
Clearly I'm no expert but wouldnt they be exposed to the market even if it is subdued. Like Australia I would think a lot of investors would be taking out margin loans and relying on the yoy growth of the last 6 yrs. Not so much of an issue if the borrowing has been responsible but in frenzied times we all know caution gets thrown to the wind.

I think the biggest issue for all these bubbles is the unstoppable element of fear, once fear sets in there will be a run on asset sales and shares. As those fears escalate any real gains evaporate as everyone who is vested run to hold onto any capital they have left. It's not a sci fi it's just human nature and no more does this exist anywhere but in Chinese culture. They are very fickle people when it comes to wealth, as a culture it's very dog eat dog (no puns pls, it is as it is written) and will happily shred eachother, and us in the process.

I'm not saying this is going to happen but if I was over leveraged I would be constantly looking at risk and the opportunity to jump before that risk bites, otherwise I'm a passenger who is willing to be at the risk of the masses up or down. Like I said I'm no genius so I am sure there is a lot of Chinese and Australians thinking the same way, fear is a powerful motivator.
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Mike
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Terry
27 Jun 2015, 01:25 PM
Oh great. Let's behave like 2-bit street hustlers in the hope of making a quick buck while ignoring the implications of financial instability caused by massive shifts in capital flight.
If you can take advantage of the situation, why not. Or do you think as an individual I can control capital flows into and out of the nation or financial stability. These events would unfold if I sell or do nothing, beyond my control. I also look to take advantage of any given situation if possible.

http://mike-globaleconomy.blogspot.com.au/
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Terry
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Mike
27 Jun 2015, 01:28 PM
If you can take advantage of the situation, why not. Or do you think as an individual I can control capital flows into and out of the nation or financial stability. These events would unfold if I sell or do nothing, beyond my control. I also look to take advantage of any given situation if possible.
Because it's very likely that you cannot take advantage of the situation and your strategy has more to do with fantasy than anything else.
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Mike
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Terry
27 Jun 2015, 01:37 PM
Because it's very likely that you cannot take advantage of the situation and your strategy has more to do with fantasy than anything else.
Tell that to the Japanese who bought at the peak in the 1980's and sold at massive discounts in the early 1990's. Its not my strategy, only a suggestion of what may unfold. If it does I will certainly look to take advantage of it.

You say fantasy but it is currently unfolding. You only need to look to Sydney and Melbourne and see the hot Chinese money chasing our property, Australians are selling out every day making a fortune at the expense of Chinese buyers who will most likely take a large hair cut in the coming few years.
http://mike-globaleconomy.blogspot.com.au/
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Terry
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Mike
27 Jun 2015, 01:43 PM
Tell that to the Japanese who bought at the peak in the 1980's and sold at massive discounts in the early 1990's. Its not my strategy, only a suggestion of what may unfold. If it does I will certainly look to take advantage of it.

You say fantasy but it is currently unfolding. You only need to look to Sydney and Melbourne and see the hot Chinese money chasing our property, Australians are selling out every day making a fortune at the expense of Chinese buyers who will most likely take a large hair cut in the coming few years.
I'm telling it to you. It's a bit of a fetch to claim that you or anyone is "making a motza" from capital flight from China. It's like the suburban dream of equating selling their home to Chinese and making off like you've won a lottery. In most cases, it's fantasy.
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createdby
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Terry
27 Jun 2015, 01:49 PM
I'm telling it to you. It's a bit of a fetch to claim that you or anyone is "making a motza" from capital flight from China. It's like the suburban dream of equating selling their home to Chinese and making off like you've won a lottery. In most cases, it's fantasy.
Boggles my mind the Chinese played the 1929 Crash playbook.

Margin lending all about loss its lustre after 1929.

There are technically banks who lend to buy shares but these are institutional arrangements, ie to hedge funds.

But for banks to lend to men on the street to speculate on the stock market is unheard of in the modern age until China.

Why did they allow it?
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Terry
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createdby
27 Jun 2015, 01:59 PM
Boggles my mind the Chinese played the 1929 Crash playbook.

Margin lending all about loss its lustre after 1929.

There are technically banks who lend to buy shares but these are institutional arrangements, ie to hedge funds.

But for banks to lend to men on the street to speculate on the stock market is unheard of in the modern age until China.

Why did they allow it?
Most Chinese investors don't have a high-school degree.

People often say that stock markets follow the "greater fool" theory - even if a stock is irrationally overvalued, it still might be worth purchasing if there is another fool out there willing to pay a higher price.

That may now be the calculus for many Chinese stock investors. As high as valuations are, novice investors keep rushing into the market. Just last week, 1.41 million new investors opened stock accounts, according to Reuters, a similar number to each of the two weeks before.

The make-up of these new investors isn't encouraging. A survey last year showed that that two-thirds of Chinese investors haven't completed high school. Even Chinese farmers are giving up tending their fields in order to tend their stocks. And many investors are young: According to Chinese-language media cited by Foreign Policy, over a third of China's 100 million investors are 30 or below.

http://www.washingtonpost.com/blogs/wonkblog/wp/2015/06/24/meet-the-worlds-biggest-stock-market-bubble-since-the-dot-com-boom/

Kind of like Australia where many people believe they are a mini Donald Trump.
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