As I understand it the issue is that a large number of unsophisticated punters signed up for margin loans and kept buying as the market soared upwards, it was an impressive rise, but we all know what happens to margin loans on the way down especially for shareholders who don't have the ability to plough in extra funds or securities.
Mind you I don't pretend to be well informed about the stock market in Shanghai or Shenzen so I expect that there will be many factors that I don't know anything about. The government shouldn't prop up failing margin loans, but maybe they are in the market buying the better quality blue chip stock via brokers.
No doubt we will see more detailed analysis of the situation over time.
Any expressed market opinion is my own and is not to be taken as financial advice
All the Government intervention is doing is creating panic. I understand why the Govt is doing it though. The share market was the last option to inflate the balance sheets (valuations) of many companies, banks which although may be private on paper are really stated owned. It has done this so it can make the debt burden seem smaller as valuations rise in a booming stock market. The wealth effect.
Now the Govt has no option but to prop it up otherwise continued falls will expose many of these banks, which is then expose the level of debt they hold. The whole rotten structure is at risk.
The US tried a similar approach in 1929, big blockages and banks got together to put a floor under the market after it feel 30%. Well we know how that one worked out. All the Chinese Govt did yesterday was give time for small investors and anyone not being "Told" by the Communist Government to buy shares, sold out of the market.
A big problem now is a loss of Confidence in a Centrally Planned Government to control the semi free market forces at work. Today is a demonstration of that, people have lost confidence that the Government can control the share market so falls from here will continue.
China could see much of its gains over the past 2 years wiped out in the next few weeks or months. The Market is now down some 32%. The market has increased by 150-180% over recent years. However almost 1/3 of those gains are now gone or more as 32% of the market at its peaks is a lot more then when the market started growing and ended up with 150% growth. At present some $3.5 trillion has vanished from the value of shares. If this bear market continues and wipes out all the gains of the last few years we could be looking at a $10 trillion dollar loss on the stock market in the coming months.
That is roughly Chinas GDP for an entire year if you believe there figures or roughly 60% of US GDP in 2014.
The biggest is is margin loans which make up 15% of share market which is the largest % of margin loans in the history of any share market world wide "ever". Even 12% of the market would be huge. 15% is enough to keep the market selling down for weeks as margin loans call in's trigger new margin calls and on and on it goes.
Forget Greece. This is the main event. This could send China into a Financial Crisis which makes the US lead GFC look like a walk in the park.
I don't understand why they are scrambling to rescue a stock market that is still up 180% in the last 12 months. Maybe someone can explain that to me.
This is why.
Quote:
The reduction in the number of new public stock offerings announced Friday — to 10 in July from 28 previously planned — will hamper party plans for state companies to pay off debts with proceeds from share sales. Investor unease could hurt official efforts to encourage state companies to rely more on capital markets than on loans from state banks. Such anxiety also might set back government efforts to encourage the public to invest for retirement to ease demand for social spending in an ageing society.
If the state companies cannot sell shares into a booming market, they cannot cover the huge debt they have built up, much of it linked to shadow banking. Many of these state companies are linked to the local governments who have also run up massive debt.
The share market was the Central Governments last play to try and reduce the massive debt burden. If the share price bust continues it will drag down much of the Chinese economy with it. The share market crash could kick of a financial crisis.
This is why the Government is going so hard, it has no real options.
I think the Chinese should accept what is going to come, let the market correct and only intervene to prop up banks or investment houses which look to be going under, like the US did in 2008. The US Federal Reserve did not pour money into the NY Stock Market, it saved the Banks and investment houses, well all but one of them. The lesson the US learnt was to not let one of the big banks/investment houses fall over, alot of pain could have been avoided. I think this is what the Chinese should do, let the marktet correct and only act to keep stability of the system, dont waste ammunition chasing share prices.
Nothing strange. In 2008, the Shanghai Composite Index fell from 6100 to 1600 in only one year.
Only 10% people in China invested in stock market, which is extremely low compared with developed countries. The stock market is not that significant in China and the impact will be very limited this time.
Nothing strange. In 2008, the Shanghai Composite Index fell from 6100 to 1600 in only one year.
Only 10% people in China invested in stock market, which is extremely low compared with developed countries. The stock market is not that significant in China and the impact will be very limited this time.
only 10% of people is not significant
They are the 10% of the richest Chinese so perhaps they can afford to burn that money... however lets not forget it's the aspiring Chinese who have actually managed to climb the ladder being burnt... they have both money and power... thus the Chinese Gov. stepping to to 'save the day' in what may be a rather foolish move.
Nothing strange. In 2008, the Shanghai Composite Index fell from 6100 to 1600 in only one year.
Only 10% people in China invested in stock market, which is extremely low compared with developed countries. The stock market is not that significant in China and the impact will be very limited this time.
All the Government intervention is doing is creating panic. I understand why the Govt is doing it though. The share market was the last option to inflate the balance sheets (valuations) of many companies, banks which although may be private on paper are really stated owned. It has done this so it can make the debt burden seem smaller as valuations rise in a booming stock market. The wealth effect.
Now the Govt has no option but to prop it up otherwise continued falls will expose many of these banks, which is then expose the level of debt they hold. The whole rotten structure is at risk.
The US tried a similar approach in 1929, big blockages and banks got together to put a floor under the market after it feel 30%. Well we know how that one worked out. All the Chinese Govt did yesterday was give time for small investors and anyone not being "Told" by the Communist Government to buy shares, sold out of the market.
A big problem now is a loss of Confidence in a Centrally Planned Government to control the semi free market forces at work. Today is a demonstration of that, people have lost confidence that the Government can control the share market so falls from here will continue.
China could see much of its gains over the past 2 years wiped out in the next few weeks or months. The Market is now down some 32%. The market has increased by 150-180% over recent years. However almost 1/3 of those gains are now gone or more as 32% of the market at its peaks is a lot more then when the market started growing and ended up with 150% growth. At present some $3.5 trillion has vanished from the value of shares. If this bear market continues and wipes out all the gains of the last few years we could be looking at a $10 trillion dollar loss on the stock market in the coming months.
That is roughly Chinas GDP for an entire year if you believe there figures or roughly 60% of US GDP in 2014.
The biggest is is margin loans which make up 15% of share market which is the largest % of margin loans in the history of any share market world wide "ever". Even 12% of the market would be huge. 15% is enough to keep the market selling down for weeks as margin loans call in's trigger new margin calls and on and on it goes.
Forget Greece. This is the main event. This could send China into a Financial Crisis which makes the US lead GFC look like a walk in the park.
Lets hope things stabilise and deflate slowly.
I have to agree.
China walked through the GFC so easily it towed Australia in it's wake... now, as it scrambles to manage it's massive debts and wage inflation (I still struggle using that term in relation to China), it finds itself exposed on so many fronts.
Realestate that is over valued and over built, share market that is hyper inflated, debts that are so massive they have to be hidden and their economic numbers still fudged to deliver whatever the government demands... not good.
What are they going to do ? call in the US T-Bills ? demand USA repay it's debts ? or just keep doubling up on Red.
Like the Greek situation... anyone who could see the deadlines as written in the time lines could (and should) have removed any substantial liquid assets into safe havens (bitcoins perhaps ?)... this gov. intervention may stem the flow of money out of the sharemarket, but it certianly buys time for the late sellers to get the hell out rather than cling on.
China is what is keeping Australia out of recession.... I suspect it will not continue to do so.
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