China’s Chaotic Market

As the world watches, the nation’s government tries to end the downturn.

Investors worldwide worry about the state of China’s equity market. These fears have impacted Wall Street.

The recent ups and downs of the Shanghai Composite (SSE) have been startling: the 16 trading sessions from June 17-July 9 included daily losses of 6.42%, 7.40%, 5.77%, and 5.90% and daily gains of 2.48%, 5.53%, 2.41%, and 5.76%. To put that in perspective, that’s the same as the S&P 500 gaining or losing 50-130 points a day or the Dow falling or rising 500-1,200 points per session.1

The SSE is now in a bear market, before that, it was up a dizzying 149% YTD.2

Is the summer slump in the SSE a measure of lost confidence in China’s economy? If so, will Chinese demand for oil, coal, and other imports weaken even more? The volume of imported goods to China fell 7% from Q1 2014 to Q1 2015.3

China’s government has taken some extraordinary steps to appease investors. Its actions make the Federal Reserve’s 2008 rescue effort look conservative.

Back then, the Fed bought mortgages and securities. The People’s Bank of China is putting its money into equities. It just created a 120-billion yuan ($19.3 billion) market-stabilization fund that the nation’s leading brokerages will use to invest in the largest SSE-listed companies.5,6

On July 8, the China Securities Regulatory Commission barred anyone owning more than 5% of a company from selling their shares for six months. Days earlier, Chinese officials suspended all IPOs, anxious about potential cash outflows from existing SSE-listed firms.4,5

The China Banking Regulatory Commission is now letting lenders roll over loans backed by shares – and it has publicly stated its support for banks extending credit to exchange-listed firms doing buybacks. Meanwhile, the CSRC is embarking on an effort to crack down on “malicious” short selling.2,4

Essentially, Chinese were told that there is no downside to investing in equities. (The Chinese government even urged people to buy shares out of patriotic duty.)2

One major problem has emerged after all this: a shortage of liquidity. Only about half of Chinese firms are trading at the moment.2,4

To some observers, these measures look like overkill given that equities amount to less than 15% of the net worth of Chinese households. (Real estate has long been the favorite investment of the nation’s rising middle class.) To economists and Wall Street analysts, these efforts are welcome correctives needed to soothe global investors as well as Chinese investors.6

The profile of the Chinese investor is changing, and it is changing in a way that might unnerve investors elsewhere. Less than 7% of Chinese own equities (90 million out of 1.36 billion people), but more are entering the market; in May alone, 12 million new retail accounts opened on Chinese exchanges as the SSE surged north. Who are these new investors? Some are college students. The Atlantic reports that 31% of Chinese university students now own equities, about three-quarters of them investing with mom and dad’s money in the process. Others lack higher education – of the Chinese households that opened investment accounts in Q1, only about a third were even headed by high school graduates.2,7

Even with its economy slowing and its market rollercoastering, the opportunity China presents is just too great to ignore. Lipper reports that retail investors have directed $3.4 billion into China-focused investment vehicles this year, representing the largest first-half investment since 2009. While that inflow might weaken or reverse itself in the wake of China’s biggest selloff since 2008, international diversification has its merits – and institutional investors recognize this buying opportunity. As fund manager Yu Zhang told Reuters, “We’re not sure how long this volatile period will last, but to me the medium- to long-term outlook for China is still trending up.” 8

In any case, what’s happening in China has effected the global markets. Those with a long term horizon, see this as a great buying opportunity.

Citations.
1 – investing.com/indices/shanghai-composite-historical-data [7/9/15]
2 – theatlantic.com/international/archive/2015/07/chinas-nervewracking-stock-market-collapse/397724/ [7/4/15]
3 – tinyurl.com/ntrfw3w [5/25/15]
4 – forbes.com/sites/gordonchang/2015/07/09/china-making-stock-declines-illegal/ [7/9/15]
5 – businessinsider.com/china-suspends-ipos-2015-7 [7/4/15]
6 – tinyurl.com/psnwgpc [7/7/15]
7 – data.worldbank.org/indicator/SP.POP.TOTL [7/9/15]
8 – tinyurl.com/nvmus8j [7/9/15]

This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by MarketingLibrary.Net Inc., for Mark Lund, Mark is known as The 401k Advisor, Investor Coach, The Financial Advisor, The Financial Planner and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. an independent, fee-only, Registered Investment Advisor firm providing 401k consulting for small businesses and financial Advisor services for professional athletes and individuals. Stonecreek is located in Salt Lake City, Murray, West Jordan, Sandy, Draper, South Jordan, Provo, Orem, Lehi, Highland, Alpine, and American Fork in Utah.

Category: Blog, Newsletters