Chinese stock markets continue to nosedive as regulator warns of panic
Main markets open sharply down as nearly 700 companies request their shares be suspended in unprecedented move
Chinese stock markets tumbled again on Wednesday as a range of government measures aimed at preventing a further nose dive in share prices had no impact.
The Shanghai Composite Index closed down 5.9%, while the Shenzhen Component Index fell to close down almost 3%.
Within 10 minutes of trading on Wednesday morning, a wave of listed companies across China’s two stock markets had dropped by the daily limited of 10% and had their shares automatically suspended. About 1,400 companies, or more than half of those listed in Shanghai and Shenzhen – filed for a trading halt in an attempt to prevent further losses. This suspension is likely to last “until the market is stabilised and liquidity is returned to the market”, said Chen Jiahe, chief strategic analyst with Cinda Securities.
China’s securities regulator said there was “panic” in the stock market with irrational selling off increasing and “leading the stock market to a situation of intense liquidity”.
As part of the latest efforts to prevent further losses, China’s state owned enterprises were ordered by the state asset regulator not to sell shares of their listed companies. The Assets Supervision and Administration Commission also encouraged them to purchase more shares in an effort to stabilise prices.
The People’s Bank of China said it was assisting China’s Securities Finance Corporation (CSFC), the national margin trading service provider - which helps brokers lend money to institutions in order to buy shares - to help steady the stock market.
It said it would do this through measures such as aiding inter-bank lending. It said it would keep a close watch on the market and continue to support the CSFC and guard against systematic and financial risks.
A spokesperson for China Securities Finance Corporation also said it would purchase more shares of small-and-medium-size listed companies. It is these companies that have suffered the biggest losses.
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Meanwhile, led by losses in China, the Hong Kong Hang Seng Index closed almost 6% down on Wednesday.
Chen said he is not sure whether the market will continue to fall at the same rate over the coming days. “The market is panicking and the government is trying to save it so we are having something like a conflict between the two powers and we are not sure which will be the strongest.”
Christopher Balding, a professor of economics at Peking University said that while it was not possible to know exactly why so many companies had suspended trading, a large number were doing so because they had used their own stock as collateral for loans and they want to “lock in the value for the collateral”.
Ayako Sera, a senior market economist at Sumitomo Mitsui Trust Bank in Tokyo, said: “Today is all about China, with Greece in the background now that it’s been given a new deadline. Shanghai’s early losses were like a cliff-dive, which had a huge impact on investor sentiment.”
Previous measures taken over the weekend by the Chinese government in an attempt to stabilise the markets appeared to have been unsuccessful. Analysts said the falls looked set to continue. Balding said: “I don’t see it getting better. There is not going to be a turn around within the next week or two.”
“It probably has a long way to go. Margin loans basically rose much faster and they are not falling nearly as fast, margin debt is not falling nearly as fast as the market is falling. What that is telling us is that there is a lot of stock that needs to be sold that hasn’t been sold yet.”
China’s stock markets had previously been among the top-performing in the world, and had hit a seven-year peak in the middle of June. The Shanghai stock market had surged more than 150% in 12 months, but it has fallen 30% over the past three weeks – including a plunge of 12% last week.
Unlike most other stock markets, where investors are mostly institutional investors, in China, 80% of investors are small retail investors. This is a concern for the Chinese government because it causes a “political risk”, according to Balding. The losses on the stock markets are going to cause a lot of people to lose money, leading the government to “worry about people protesting on the streets”, he said.
The rout has been massive, but the global impact so far subdued as foreign exposure to Chinese stock markets is rather low, with laws until recent times complicating foreing participation in the stock trade.
I think that it was obvious the pop of the bubble was coming, with 100% year on year appreciation against an economy in the middle of a slowdown. Hope the Chinese learn from this.
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This Is Why So Many Chinese Companies Are Suspended
China's corporations have been big fans of stock-based loans, too
by Tracy Alloway
July 8, 2015 — 8:42 AM EDT
At least 1,331 companies have halted trading on China's mainland exchanges, freezing $2.6 trillion of shares, or about 40 percent of the country’s market value, Bloomberg reported on Wednesday.
The Shanghai Composite Index fell 5.9 percent on Wednesday. It's now about 32 percent below the peak of 5,166 it reached on June 12. The unwinding of margin loans is adding fuel to the fire. Individual investors in China, as we all know by now, have used generous margin financing terms to enter the stock market and then build up their portfolios. Less-known is that Chinese companies have been doing the same thing by using their own corporate stock to secure loans from banks.
This means that they stand to lose a lot when those share prices start trending dramatically lower.
Says Nick Lawson at Deutsche Bank: "Stocks are being suspended by the companies themselves because many have bank loans backed by shares which the banks themselves may want to liquidate, joining the queues of margin sellers."
Nomura analysts added that: "Some bank loans have been extended with shares of listed companies put up as collateral."
Numbers here are sketchy, but the team at Nomura estimated that the total amount of such loans may be 500 billion yuan to 600 billion yuan ($80 billion to $96 billion). This sounds like a lot but is equivalent to about 1 percent of total loans to Chinese enterprises.
Still, the dynamic at play is reminiscent of the troubles encountered by U.S. energy companies, thanks to the plunging price of oil. Many shale explorers have bank loans tied to the value of their oil and gas reserves. When the price of oil began sinking last year, those credit lines were generally reassessed at a lower value, limiting the amount of credit available to the energy companies and putting further pressure on companies that were already dealing with the fallout from dramatically lower crude prices.
The easiest way to stop a painful cycle by which lower share prices lead to curbed corporate credit, further troubles for Chinese companies, and ever-increasing share price pressures is to halt stock trading altogether.
Speaking of which, the latest move from Chinese regulators announced on Wednesday bans corporate executives from selling stock for six months.
This vicious circle described above also explains why China's central bank has quickly moved to support the market in an effort to limit its effects on the wider economy.
STGOD: Byzantine Empire Your spirit, diseased as it is, refuses to allow you to give up, no matter what threats you face... and whatever wreckage you leave behind you.
Kreia
The news is reporting that because of significant Chinese investment in Europe and the UK in particular, as well as being a significant trading partner, this could hurt Britain economically.
In previous times, the stock market has crashed and gone up and the "real economy" of China just keeps on ticking.
Obviously those who invested lose out, although if they started one year ago they are still 30% ahead.
Never apologise for being a geek, because they won't apologise to you for being an arsehole. John Barrowman - 22 June 2014 Perth Supernova.
Countries I have been to - 14.
Australia, Canada, China, Colombia, Denmark, Ecuador, Finland, Germany, Malaysia, Netherlands, Norway, Singapore, Sweden, USA.
Always on the lookout for more nice places to visit.
mr friendly guy wrote:In previous times, the stock market has crashed and gone up and the "real economy" of China just keeps on ticking.
That was before we had eleven trillion dollars in over-liquidity criminally laundered in biggest scam in history hidden in tax havens and sloshing around for quick slash and burn speculation.
Obviously those who invested lose out, although if they started one year ago they are still 30% ahead.
In China's case, lack of institutional investors means those who lost whole savings were common people. And, since China has no safety net to speak of, well...
Everyone freaking out about China's stock market crash is missing one thing
ELENA HOLODNY
The Shanghai Composite Index has fallen 27% in less than a month — a huge drop compared to the 117% gain over the last eight months.
And this splashy volatility has everyone worried about the precipitating negative effects on the Chinese economy.
But the actual effect may be less than analysts are expecting:
“The stock market wealth effect in China is smaller than many assume, as stocks represent less than 15% of household financial assets and equity issuance accounts for less than 5% of total social financing,” writes HSBC Chief Economist for Greater China, Qu Hongbin in a July 7 note to clients.
For the average household, consumption growth in driven primarily by income growth, not changes in wealth, according to Qu. And, furthermore, most households put their wealth in cash and deposits — not stocks.
As for corporations, most of them don’t rely on the stocks as a source of financing, and a huge part of China’s banking sector isn’t “imminently linked” to the stock market, according to Qu.
Excluding the recent IPO surge, the total equity financial year-to-date makes up less than 5% of the total social financing.
And “third, although margin financing on the equity market has risen rapidly, the trend has started to reverse over the past few weeks,” according to Qu.
Interestingly, not only do most Chinese people and corporations stay out of the stock market, but many also have a different view of the system than the average American or European.
“Local investors see the stock market as a short-term place for profit-taking, not an indication of China’s well-being, and are far more confident in the Chinese authoritarian, state-capitalist system (and are certainly untroubled by its sustainability as a new, hybrid model),” Eurasia Group president Ian Bremmer wrote in a note on Monday.
“I met hundreds of Chinese from very different corners of the Chinese system, and encountered no sense of impending economic crisis,” he added.
Of course, none of this means that Beijing’s just going to ignore what’s going on. Volatility still poses a threat to overall financial stability, and the government’s still trying to control the market (not unlike the US did back in 1929.)
Never apologise for being a geek, because they won't apologise to you for being an arsehole. John Barrowman - 22 June 2014 Perth Supernova.
Countries I have been to - 14.
Australia, Canada, China, Colombia, Denmark, Ecuador, Finland, Germany, Malaysia, Netherlands, Norway, Singapore, Sweden, USA.
Always on the lookout for more nice places to visit.
Pinched the image from wiki, as I figure they won't mind. I don't really pay attention to the Chinese stock market per se because at present it most probably doesn't reflect China's wider economy, which is what I am interested in. However a claim on another board was brought to my attention, making me look this up.
Basically the crash in Chinese stocks was even worse in 2007, with the Shanghai composite index reaching 6000 before falling to around 2000. As of Thursday the Shanghai composite index closed at 3709.33, nowhere near the bubble in 2007. So a bigger collapsed occurred a few years ago and the Prophets of doom either forgot about this, or only realised China's crash now. China just soldiered on, still experienced high GDP growth despite this even bigger fall of 2/3 of its value.
This will most probably have more political than economic fallout.
Never apologise for being a geek, because they won't apologise to you for being an arsehole. John Barrowman - 22 June 2014 Perth Supernova.
Countries I have been to - 14.
Australia, Canada, China, Colombia, Denmark, Ecuador, Finland, Germany, Malaysia, Netherlands, Norway, Singapore, Sweden, USA.
Always on the lookout for more nice places to visit.
