The Saga Continues: China’s Share Market Crash
China’s stock market is not getting any better. According to Bloomberg, as of August 31, China’s Shanghai Composite Index dropped 2.2% to 3,162.33 while the China 50 ETF declined at 2.9%.
Last August 26, its Shanghai Composite Index closed down 1.2% to 2,927. The stock market crash last August 24 was even referred to as “Black Monday” with Chinese equities down to 8.5% according to The Economist.
For five straight days of losses, the market experienced a 22% loss and the Chinese stocks have already lost 43% of their value since June.
According to Forbes, the loss brings to an end the worst month for stocks in China since August of 2009, when China was still reeling from a global financial panic and recession that caused massive losses in financial markets around the world.
It was stated in an earlier article that Shanghai Composite (SSEC) suffered a crash of 30%, a 1481.99-point loss, in the past months, and losing almost $29 trillion in value.
A few days into the month of August and the Chinese share market has seen no signs of change in its current state. The government is taking all necessary actions to alleviate this economic dilemma.
The effect on China and the U.S.
The said market drop was reported to have minimal effect on China’s citizens but is seen to have a major effect on the other countries, more specifically in the United States of America. This is because financial analysts project that the fall of China’s stock market might cause a wary effect on its investors. This then leads them to invest in a more stable market, ergo the United States – leading to the increase in the country’s bank reserves and a stronger dollar.
But how does having a stronger currency have a negative effect to the United States?
For one thing, a stronger dollar means bad news in the export market. This is because it raises the prices on goods that U.S. exporters sell abroad.
According to Time, even before this predicted rise in the dollar, the United States companies have been having some trouble at generating profit growth because of the already strong currency. As it rises in general in the past year or so, S&P 500 profit growth has slowed from a pace of around 10% last year to less than 1% this year.
If China’s stock market continues to drop, more and more investors, including the Chinese themselves, will shift to the U.S. for refuge.
And if that’s the case, it will be that much harder for the companies in the United States to boost their profits. This will ultimately be troublesome for the U.S. stocks.
When will this end?
The huge drop that caught many investors off guard, however, prompted regulators to once again vow their support for the market, one that is caught in a difficult situation.
Reuters reported that China’s securities regulator said it was ready to procure shares to calm the market and prevent systematic risks. It also said that proper authorities would deal with anyone engaged in the “malicious shorting of stocks”
Last July, the central bank used reverse-repurchase agreements to pump 50 billion yuan into the banking system. This is reported to be the largest amount of funds through open market operations since July 7. According to Reuters, it has been said that it would use various monetary tools to maintain appropriate levels of liquidity.
So far, the government’s attempt at increasing investor confidence has had only a short-lived effect.
Since the end of June, the Chinese government has stepped in with a number of ideas on how to rescue the falling stock marketing. These ideas range from monetary policy easing to a freeze on initial public offerings (IPOs).
Mark Eibel, the director of client investment strategies for Russell Investment, told CNBC, “To me it’s just another painful lesson that what goes straight up is not sustainable – [there are] lots of margin accounts [with] individuals holding them – that’s not a recipe that ends well”.
So, where do investors, like Mark Eibel, go from here?
For those who can handle volatility and is looking for a longer investment horizon, strategists recommend gaining exposure to H-shares, or Hong Kong-listed mainland stocks.
Chris Konstantinos, director of international portfolio management at Riverfront Investment Group, said “If you don’t mind trying to catch a falling knife, the H-share market valuations are starting to get down in the range where there’s long-term valuation support. That market is trading as sub-10 times [price-to-earnings]”.
“For the really risk-tolerant, watching the H-share market may be interesting,” he said.
Investors who plan to join in the bandwagon should keep in mind that trading in the Shanghai market tends to influence the performances of the Hong Kong-listed stocks.
“A lot of Chinese investors do hold Hong Kong stocks,” Andrew Sullivan, managing director for sales trading at Haitong International Securities, told CNBC. “Once the stocks hit 10 percent down in China, you can’t sell them. So if you can’t sell in Shanghai then you have to look in other markets where you can sell. That’s why Hong Kong got some of the flak.”