China’s casino capitalism leads to a crash.

Some notes for reading on China  ; some facts and figures. 

• China's  indebted property developers, corporations, and local governments. gave it a 10 percent annual economic growth from 1980 to 2012.
• Now the economy has decelerated to about 7 percent annual growth and is flooded with  debt. Government, corporate, and household borrowing totaled $28 trillion as of mid-2014, or about 282 percent of the country’s gross domestic product, according to McKinsey.
• The Chinese economy that has been growing between 7 and 14 per cent annually for the last decade has failed to create a thriving stock market, and shares have been performing poorly. Investments on China’s benchmark stock market, the Shanghai Composite, made a loss of 30 per cent between 2009 and July last year. China in the past is good economic growth has not translated into good corporate earnings growth.
• Investment fever has also gripped ordinary Chinese people, and the last few years have been characterised by rapidly rising property values, a huge growth in wealth management products and an escalation in debt. People have been very aware that the economy has been flying, and have been keen to get a piece of the action. 
• But things have changed radically. The Shanghai Composite has ripped ahead and risen 173 per cent in the past 12 months. China's stock market has been on a roller-coaster ride, sometimes opening with a jump of as much as 7%, before ending the day down by that much.
• Shanghai opened up a strong 8.5% on Monday. But shares slipped throughout the trading day and closed up only 2.5%. On Tuesday, Shanghai slipped 1.3%, and on Wednesday plunged 5.9%.
• Now it has stock markets awash with credit falling. Most of these investors have utilised margin funding facilities and are heavily leveraged. Goldman Sachs pointed out in a report that the outstanding margin financing, at 2.2 trillion yuan ($355 billion) is more than five times of what it was a year ago), was the equivalent of 12 per cent of the value of all freely traded shares on the market, or 3.5 per cent of China’s GDP. Shares have fallen by a third in less than a month, wiping out some $3.5 trillion in wealth, which is more than the total value of India’s stock market.
• By July 7th , 2015, trading in over 90% of the 2,774 shares listed on Chinese exchanges was suspended or halted.
• China's stock markets were in a state of freeze, with the shares of around 1,500 listed companies worth around $2.8 trillion - roughly half the market - suspended. More than 1300 Chinese companies (more than 40 percent of total market cap of China equity market) voluntarily suspended trading of their shares in the first ten minutes of trade.
• Those still trading propped up by state-directed buying.
• Shanghai Composite Index has since fallen 28 per cent since the peak on June 12. Hong Kong's Hang Seng Index slipped below the 25,000 mark, while the Hang Seng China Enterprises Index lost 3.30%. 
• Stocks only make up 15% to 20% of Chinese households' wealth. This should help keep some spending money in the pockets of consumers but nevertheless it hurts.
• From mid-2014 until early June, ChiNext, a market for start-ups, more than tripled.  ChiNext price-to-earnings ratio had reached 147, putting it in the same league as NASDAQ during the dotcom era
• The free-float value of Chinese markets—the amount available for trading—is just about a third of GDP, compared with more than 100% in developed economies.
• Only 1.5% of Chinese shares are owned by foreigners, as China still limits the amount of overseas investment.
• The Bank of China cut short-term interest rates for the fourth time this year.
• Regulators relaxed margin requirements and cracked down on short sellers.
• Brokerages and mutual-fund companies said they would buy billions of dollars’ worth of Shanghai shares.
• Twenty-eight companies said they would put planned initial public offerings on hold.
• Regulators increased the kinds of assets that can be used as collateral to buy stocks, to include  people’s homes.
• The banking regulator said separately it would allow lenders to roll over loans backed by stocks.
• Morgan Stanley told CNBC that there was no fundamental basis for massive rally in China. Morgan Stanley, sees Chinese stocks at 3250 by mid -2016. 
• Citigroup analysts say  the selloff has a long way to go.
• The stock rout may constrain consumption, as people suffering losses are unlikely to spend.
• An economic slowdown and wider impact from a fluctuating stock market have compounded fears of a downturn in China have already pushed commodity prices down.( iron ore and copper ).
• China market accounts for quite a bit of international consumption: e.g.  20 percent of Jaguar Land Rover sales.  
•  Australian investors were caught up in a $500 billion region-wide selloff as the storm besetting Chinese markets deepened and key commodity prices fell. The benchmark S&P/ASX 200 index plummeted 2 per cent on Wednesday, to 5469.5, handing back  
• However, the contagion is limited as China’s has highly restrictive regime for inward investment:  
• Exchange rate management and reserve accumulation: the Chinese exchange rate is currently close to equilibrium; however, if China’s economy slows down much further there could be pressure to depreciate the currency in a way that would be destabilizing for the Asian economy
• Shares in Chinese companies have been a tightly controlled market. But a landmark initiative was launched last November allowing foreign investors to buy Shanghai-listed A shares through a Hong Kong broker. It was a called the Shanghai-Hong Kong Connect service and was a pivotal moment in the opening up of China’s investment markets.
• Chinese companies will now be subject to greater scrutiny. Investors in the West have high standards when it comes to assessing businesses, but historically the cultural ethos in China has been more about ensuring full employment than making companies profitable. The business community has been willing to accept inefficient use of labour in the system.
• Even companies such as China Mobile, which has 800m customers, are talking about the need to make profits as the primary goal of their business.
• At the same time there has been debt build up. A year ago it seemed as though a "shadow banking"  would hurt. Then came the property bubble and now the stock market bolstered by state intervention. Left to itself, there we\ill be free falls.  

References:

(http://www.bloomberg.com/news/articles/2015-07-09/who-blew-up-china-s-stock-bubble-)

(http://www.brookings.edu/research/opinions/2015/01/20-china-economic-challenges-us-india-implications-dollar)

( http://www.reuters.com/article/2015/07/09/china-markets-idUSL3N0ZP2WE20150709)

(http://www.cityam.com/218091/china-madness)

(http://www.economist.com/news/leaders/21657395-panicked-response-tumbling-stocks-casts-doubt-pace-reform-china-embraces)

(http://www.marketwatch.com/story/chinas-stock-market-crash-is-just-beginning-2015-07-08)

(http://www.skynews.com.au/news/top-stories/2015/07/09/china-markets-in-the-grip-of--panic-selling-.html#sthash.Giaw7cV2.dpuf)

http://www.moneycontrol.com/news/local-markets/china-equity-turmoil-drags-sensex-484-pts-nifty-below-8400_1858161.html?utm_source=ref_article

http://www.indiainfoline.com/article/news-top-story/metal-stocks-tanks-2-on-weak-metal-prices-post-china-equity-fall-115070800267_1.html)

( http://www.wsj.com/articles/asian-markets-lower-amid-twin-fears-of-china-greece-1436318951)

(http://www.scmp.com/news/china/policies-politics/article/1834359/political-power-vs-market-muscle-chinas-government)

( http://www.smh.com.au/business/markets/china-panic-feeds-into-australian-sharemarket-20150708-gi7nyk.html)
(www.reuters.com)

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