Greece’s woes are not the only problem these days. The situation in China looks far from rosy with over 1300 companies halting trading on mainland Chinese exchanges Wednesday, impounding about 33 percent of China’s market capitalization.
The two major Chinese exchanges have zigzagged over the past 2 years as Shanghai ballooned 150 per cent over 12 months and Shenzhen shot up almost 200 per cent during the same period. Following the biggest stock boom in its history, things began to go sour. June 12th, 2014 was the start of the bust that has since been dubbed “The Great Fall of China” and since then, Shanghai’s numbers are down 30 per cent and Shenzhen’s 40 per cent.
Beijing officials stood at the sidelines most of the time until the situation reached a crisis point and then the panic began. But all attempts to turn things around have not been effective so far. The People’s Bank of China tried to raise interest rates. IPOs were postponed to so the supply of new equity would be curtailed. And brokers went out of their way to promote investments. But prices continued to spiral downward.
Theories Abound
It isn’t clear what is causing this stock market bust and as can be expected, there are plenty of theories and analysis. One analyst points to the fact that the Chinese markets are not like most other stock markets. There’s something called a free float-market capitalization ratio which is the proportion of shares of publicly traded companies that are traded in the stock market. Companies with a lower free float are likely to experience more share price volatility as the government has more of a stake in them and it takes fewer trades to move the price significantly. The New York Stock Exchange has a 94 per cent free float and the FTSE 100 has 90 percent. According to estimates from analysts at the Australian bank Macquarie, the effective free float of the two Chinese indexes is less than half the outstanding market capitalization--35 per cent in Shanghai and 44 per cent in Shenzhen.
Another reason proffered for the sudden downfall of the markets is the nature of the Chinese investor environment. The Chinese people have very little choice over what to do with their money which seems to be abundant of late. They are not permitted to move the money out of the country and bank interest rates don’t cover inflation. Real estate has proven to be profitable until now but with property values dropping, this choice is no longer viable.
What’s a person with money in his pocket supposed to do? Stock markets have been the most attractive venue and as long as the prices were moving up, there was no reason to worry. But since investors are allowed to buy only domestic and not international shares, the minute these markets are hit, many people go down with them.
Analysts point to the slowing Chinese economy as the major reason for the sudden market crisis. China’s GDP grew only 7.4 per cent in 2014, the weakest since 1990 as a result of attempts by the government to shift growth from investments to middle class consumer spending. This approach has obviously failed and that’s why so many Chinese are bleeding at the moment.