Shanghai stock market dive highlights China’s economic woes
An investor walks in front of a stock price monitor at a private securities company in Shanghai. Pic: AP.
China started the week on the wrong foot, as the Shanghai composite index tumbled 7 percent, declining from 3,377 points on Friday to 3,114 points on Monday. It has been its worst crash since 2008, when it fell 7.2 percent. The crisis was triggered by China Securities Regulatory Commission’s decision to clamp down on margin lending, as the practice of borrowing money from a broker to purchase stock is defined. On Friday, authorities banned Haitong Securities, Guotai Junan and Citic Securities from opening new margin trading accounts for three months. Unsurprisingly, banking companies were the worst-hit by the slump, with some losing over 10 percent of their value, the maximum allowed in a single day.
According to Bank of America Merrill Lynch, margin trading in China is up 9 percent in 2015, a number that looks quite dodgy, as margin trading tends to magnify both gains and losses. In an interview to the Associated Press, Dickie Wong, executive director of research at Kingston Securities in Hong Kong, argued that the introduction of margin financing and short selling caused plenty of excitement in the Chinese financial world: “In the past, mainland investors had no clue on margin financing and short selling, but after China introduced these two ways to trade stocks, people became so happy because they can borrow money and just go all in.”
The blow came after an incredibly good year for the Chinese stock market, which grew 53 percent last year. According to The Economist, Chinese investors flocked to stocks, with something close to 600,000 stock accounts being opened in the first week of December, “almost four times the average since July.” The Central Bank’s decision to cut interest rates on November 21 added fuel to the fire by seemingly confirming that monetary easing was on its way.
Sure enough, not everyone was convinced by the soaring markets: on December 5, right after two golden weeks of surging stocks, Bloomberg interviewed Ken Peng, a strategist at Citigroup’s private bank in Hong Kong, who argued that “China’s stock rally in the last two weeks can’t be explained by any economic fundamentals.”
Fundamentals are indeed a big issue. Even if one brushes away concerns about the recent slump – it was, after all, caused by a sudden government decision and on Tuesday stocks were back in positive territory – economic data is gloomy, at least by Chinese standards. Property prices, an essential element in the Chinese economy, have been under the spotlight for quite some time. In December they fell by 4.3 percent in 68 of the 70 major cities surveyed by the National Bureau of Statistics (NBS), while debt has grown from 176 per cent of GDP in 2007 to 258 per cent last year, fuelled by a dangerous credit binge.
Even GDP growth, the single most important gauge of China’s economic rise, is showing signs of weakness. According to figures published yesterday, the Chinese economy has expanded by 7.4 percent in 2014: better than most expected and a great performance when compared to other major economies, but still below the government target of 7.5 percent and the slowest growth registered in a 24 years. The trend seems likely to continue: the International Monetary Fund (IMF) has just reduced its growth forecasts for China to 6.8 percent in 2015 and 6.3 in 2016, down 0.5 points from previous previsions .
