The Chinese stock market exploded by 50% in the 4th quarter of 2014. The rally continued into this year with the Shanghai Index rallying from 2000 last summer to over 5000 this June. It has fallen 30% in the last 3 weeks despite government attempts to stop it.
The Chinese authority have reacted as follows;
- Cut Interest Rates
- Ease margin trading regulations
- Reduce trading fees by 30%
- Regulator announces investigation of market manipulation
- All IPOs suspended.
- 21 Brokers set up $20Bn stock buying fund.
- Top 25 Chinese mutual funds commit to buy and hold stock for 1 year.
- China sovereign wealth funds starts buying stocks.
- Bank of China offers liquidity assistance to margin traders.
It is hard to rationalize the Beijing authorities’ actions on the basis of the stock market gyrations alone. Arguably this panic is less important than little Greece because the Chinese stock market is relatively closed to outsiders. And realistically the only people hurt are people who may have bought in the last year.
However what makes this important is the fact the Chinese are fighting a number of other demons in their state directed economy. According to Forbes there are 60m empty apartments waiting for buyers and we have all read about empty shopping malls and ghost cities. I think their failure to control this market does not bode well for their other internal markets.
Much of China’s economy has been based on a state sanctioned infrastructure build out. This looks to have petered out. A slumping Chinese economy and the state inability to rescue it will have real reverberations beyond its borders.