Today we find stock markets in China in a huge imbalance. The last month or so the marked has been going up and down with 10% in just a few hours; up 6% one minute and down 5% the next. Knowing that investors have put $2 trillions of their and borrowed money in this marked (margin lending) we find them filled with anxiety. $300 billion are given as credit to investors directly from Chinese trade companies only, and that is only the OFFICIAL trade loans. Beside this is the regular loans obtained in the banks. Now when the market is falling we find panic filled investors quickly sell to pay down their loans; as a result the market fall dramatically. Remember that about 90% of all trade at Shanghai – and Shenzhen stock exchange is done by normal people; small investors, mostly financed with private loans. Close to 15% of Chinese households own shares! Most of them tempted by an enormous increase in the market earnings the last year or so; until now.
The main market went down almost 6% last week; down almost 30% in three weeks (12% last week only); about 44 billion pesos. The shares have been growing faster in cost than the economic growth in China. Now the economic growth has slowed down, but the stocks have continued to grow in cost. This imbalance is one of the main signals of a Bubble. When this bubble burst the complete World will get problems. It is estimated to a needed minimum 35% reduction in the shares to level their value with the economic growth in China. In the adjustment period we will find even more dramatic ups and downs. Have in mind that a 35% fall represents an easing of about $1.5 trillion from the pockets of the investors. In plain words, it is trouble ahead. Greece might be seen as nothing in comparison when the bubble burst. China is IMPORTANT in the World, and Greece is “NOTHING” in the World. What happens in Greece is politically interesting, but does not change anything major in the world economy.
The official China tries to calm down the situation, but they see the danger getting closer day by day. They have even “denied” the Chinese media to write anything negative about this topic. They have also adjusted the interest rate to its lowest level ever and injected about 350 billion pesos into the instable market. The official China has found different excuses to this bubble, but no cure. If the Chinese economy get into trouble (it is) the rest of the world will notice that China stop buying products and raw materials from the West. For example half of the aluminum in the world is bought by China. It is 100% sure that China will fall, but we do not know how deep and when! Luckily the Chinese stock market is arranged separated from the Chinese economy. Thereby we will find less direct effect on the country’s economy when the Bubble burst. Actually, the rest of the world depends on the stability of the Hong Kong Stock exchange. If Hong Kong falls with more than 10%, the complete world will most likely fall! Remember that China is the second largest trading partner to Europa and USA.
After the market have increased nonstop for 1000 days; 150% in one year. 25 million new investors arrived on the stock market in April and May month. In total 92 million investors filled the market, in comparison the communist party has just 88 million members. The communist party is on a serious retreat just as the capitalistic stock market. Double Bouble!
Read this article about Business that I wrote in April for more information. Press here