Chinese Stock Market Declines of Deep Concern to Investors
During July 2015, the Chinese stock market has declined by 8% year to date. By contrast, U.S. listed Chinese stocks have declined by as much as 10% year to date. The fact that U.S.-listed Chinese stocks have tumbled faster than their Chinese counterparts is a grim reality that U.S. investors are now faced with. The rapid decline of China’s stock market is sending shockwaves throughout the world, and U.S. investors with diversified portfolios in foreign asset holdings, including 401k accounts are now deeply concerned about their investments. The Chinese stock market has been bruised and battered of late, with prices falling as much as 26%. In the U.S., stock markets have generally been bullish and positive returns in the U.S. have been a safe haven for investors since the recovery from the 2008 global crisis took root.
A Greek Tragedy?
The big story dominating global economic news is the ‘No’ vote in the Greek referendum on Sunday July 5. The overwhelming consensus in Greece is that no further austerity measures will be tolerated and Greece is determined to renegotiate its debt repayment obligations as well as further bailouts with its creditors. That Greece has not come to the table with anything substantive has upset European finance ministers and other high-level members of the Troika (EC, ECB and IMF). However, the ECB is ready to tackle the fallout from a possible Grexit with the option of further quantitative easing. Germany, France and other high-level players in the EU believe that the common currency union can withstand a Grexit, but it’s the domino effect that investors fear more. Countries like Spain, Portugal and perhaps Italy are also facing a precarious financial predicament, and the Greek ‘No’ vote may embolden these countries to renegotiate their own financial futures.
Feeding the Chinese Juggernaut
For all the aforementioned reasons, China has largely stayed out of the spotlight. But the Chinese stock market slide is markedly more important for investors. The volatility of the Chinese stock market is well documented. The peaks and troughs are known to investors, but the economy has been running out of steam lately and it is evident in stock prices. The nature of the Chinese economy is different; it is a command economy where the state dominates in most every conceivable way. Most stocks in China are held by everyday investors but the majority of Chinese people do not own stocks. And since the government is likely to step in and prop up its banking system whenever needed, there is little cause for concern at this stage of the game. China’s foreign currency holdings are enormous, so are its holdings of commodities like gold and copper (among others). A March 2015 article penned in the Wall Street Daily stated that China would spend over $24.7 billion to increase its stockpiles of edible oil, grains and other materials during 2015. That dovetails with huge amounts of crude oil and copper that China snapped up while prices were low in 2014.
The big question on investors' minds is what is going on in China. The stock market is clearly reeling, but there are concerns that the market is mirroring the state of the Chinese economy overall. Shares of Chinese stocks listed on the U.S. exchanges are markedly lower and major companies like Alibaba (BABA) are down to their lowest levels since listing. It is clear that the maladies in the Chinese economy are widespread and far more pervasive than the volatility in the Shanghai exchange. If the economic contagion that is being reflected in the Chinese stock market is not contained, it may be an ominous sign for investors. While many investors are taking a ‘wait and see’ approach with China’s stock market, there are other investors seeking bargains with falling prices. This has led to speculation that the bubble may be bursting in China. On a positive note, the Chinese government is intent on transforming the economy with a growth target of 7% set for 2015.
The Performance of the Chinese Stock Market
During the past year, the Shanghai composite index spiked by over 80% - largely due to the actions of speculators. By June 12, the market reached a high of 5,166.35 and has since retraced 27%. On a positive note, the Shanghai composite index is up 15% for the year. The Chinese economy has shifted to a service-oriented economy from a manufacturing-dominated economy. A big issue with China is the manner in which the country finances its investments. China’s debt/GDP ratio is hamstrung by the lack of capital markets. As a result, the Chinese are dependent on debt financing. It appears that the Chinese growth rate for the year will be in the range of 6.5%, perhaps as much as 7% - in line with the finance ministry’s expectations. The Chinese stock market has seen record outflows of investment funding, and huge selloffs by margin traders.
The Chinese government has not allowed negative sentiment to go unchecked. Analysts from Banc De Binary caution against going bearish on China. The government has many tools in its arsenal to prop up the market. The short-term consensus is bearish for Chinese stocks, but the CSI 300 hit a 7-year high in June and there is plenty of room for upward momentum. Policymakers in China have introduced a series of measures to support the market. These include reduced transaction fees, suspension of IPOs, easier margin trading and the like. A market support fund was established by 21 brokerage houses to the tune of $19.3 billion. There is no doubt that over-valuation exists in the Chinese market, but the fundamentals are sound and the government has enough resources to turn things around if need be. In line with their long-term bullish outlook for Chinese stocks, traders continue to learn binary options with an eye to placing call options on Chinese commodities, indices, and stocks.
