The long-expected bear market has arrived in the Chinese stock market. Heavily leveraged investors are piling out of the Shanghai market as prices plunge. Because trading is halted on a stock when it falls ten percent in a day getting out of the Chinese bear market may be difficult. The New York Times discusses the Chinese bear market.
An interest rate cut by China’s central bank on Saturday failed to stem the rout in Chinese share prices on Monday, and the Shanghai and Shenzhen stock markets closed with steep losses after their wildest swings in percentage terms in more than two decades.
The markets gyrated from initial gains of more than 3 percent, in response to the central bank’s action, to losses of more than 7 percent by early afternoon. The Shanghai market closed with a loss of 3.3 percent, while the especially volatile Shenzhen market plunged 6.1 percent.
The losses pushed both stock exchanges into bear markets, with stock prices declining more than 20 percent since their peak on June 12. Much of those losses have been in just the past two trading days, as indexes at both exchanges fell more than 7 percent on Friday.
Heavy losses among individual investors pose an economic and financial dilemma for the government and possibly a political challenge as well, if unhappy speculators start protesting that the government should do more to help the market.
Over decades of near-miraculous growth, Chinese investors have become accustomed to borrowing in order to invest. Trading margins are high. Then, when the market starts to fall, getting out of the Chinese bear market means taking substantial losses or risking a margin call.
Margin Calls in Chinese Markets
The South China Morning Post writes about margin calls and a panic sell-off in China.
Mainland shares suffered some of their biggest falls in years yesterday, as investors dumped stocks indiscriminately to meet margin calls.
The blue chip CSI300 Index fell 7.9 per cent to 4,336.19 – its biggest drop in seven years – and the Shanghai Composite index lost 7.4 per cent, or 334.14 points, to close at 4,192.87.
But the worst damage was in Shenzhen, where the city’s benchmark index fell 7.87 per cent, or 213.7 points, to 2,502.9, officially entering bear market territory after a fall of more than 20 per cent from a June 12 high.
In the past two weeks, 14 trillion yuan (HK$17.4 trillion) has been wiped off the value of mainland stocks – some 20 per cent of mainland market capitalization and three times the value of Apple, the company with the world’s biggest market cap.
If you got into Chinese stocks early and did not invest or trade on margin is getting out of the Chinese bear market an issue? After all the old blood in the streets investing scenario suggests that the time to invest is often when things look their worst.
Stock Prices Not Related to the Real Chinese Economy
A writer in Forbes begs to differ regarding the real strength of the Chinese economy versus Chinese stock prices.
With the Shanghai index down nearly 20 percent from vertiginous heights reached in mid-May, a lot of people are wondering what next – and not a few are suggesting the Chinese economy is headed off a cliff. Pat Choate begs to differ. “The connection between Chinese stocks and the real economy is zero,” he pronounces. “Chinese corporations do not need high stock prices to keep expanding. They are government-owned entities financed by a government-owned banking sector.”
So, maybe now is not the time to worry about getting out of the Chinese bear market but rather adding a little to your investments.