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.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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