China’s stock markets in free fall

The Chinese bull is no longer roaring as the markets have been in free fall for the past three weeks. The main index, the Shanghai Composite, has dropped more than 30 per cent, since its peak in the middle of June, the biggest three-walk fall in 20 years. The value of Chinese stocks is said to have plunged by US$ 2.8 trillion. A lot of questions are now being raised on the policies adopted by China, with retail investors suffering huge losses. Retail investors account for about 85 percent of turnover, and the recent correction has greatly endangered their belief in the capital market opening-up and reform, and might even cause social unrest, according to some analysts.

Beijing has been struggling to find policy measures that would restore confidence such as easing monetary policy or pension funds investing in stocks and a host of other measures. The market regulator has ordered an investigation to check for manipulations in the markets. The crash also shows the massive rise in debt levels in the markets with investors who borrowed to buy shares in the markets now face huge amount of losses. Also, with the Chinese GDP growth slowing down 7.4% last year, which is now called the new normal growth, is the lowest in 25 years.

Slowing growth rate, along with spiraling debt levels, is adding to the woes of China, as it was the debt that helped fuel the initial rally and that has now come back to haunt China. The government gambled with the investors’ wealth, thinking it could move into the real economy and allow companies to get the cash they need to grow in the technology ladder and innovate. With the crisis setting in, it now may force the government to scale back its initial plans of economic reforms in the banking and financial sectors.

The real test for the government is on how it is going to handle these challenges. Beijing deftly handled the crisis in the past but this is no guarantee since the last time it didn’t have a major debt crisis.

Highlights

Biggest stock market bubble in recent times in China

A loss of market capitalization of closed to US$2.8 trillion, which is more than the GDP of many countries

Spiraling debt crisis facing China

Fear of social and political unrest, if the crisis continues

Slowing growth rate reaching levels of 7% lowest in 25 years

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