Little Trouble in Big China?

Prior to the crash in the Chinese stock market, the Shanghai Composite Index had risen by 150% over one year. It subsequently crashed 30% erasing over half of the gains, but many investors got in toward the tail end of the market with borrowed money and are facing steep losses. One young man gambled with his parent’s money that was earmarked for his wedding. The two-minute video below, produced by the Wall Street Journal highlights the rise and fall of the stock markets in China and touches on some of the extra steps the Chinese government is taking to try to prevent their stock market from crashing further. The video plays after a short advert from one of WSJ’s sponsors.

Item 1 from the video is that over half of the companies that trade in the Chinese stock markets chose to have their shares suspend trading for a week. Just imagine the chilling effect it would have in the Unites States if half of the shares stopped trading for a whole week and no one could sell those shares if they needed the cash. Taken together, it looks like the kitchen sink has been thrown at the Chinese market. Here are some of the other measures the Chinese government is taking / has taken:

1. Chinese Public Security threatened to arrest anyone who dared to short Chinese stocks (those who try to profit from market declines).

2. The government gave the largest stock brokerage houses cash so that the brokerages would buy over $20 billion in stocks, and are forbidden to sell them.

3. They forbid large holders of stocks from selling for 6 months–if the holder owned 5% or more of the shares of a stock. This would prevent owners and executives from selling.

4. They relaxed margin lending, making it easier on people who borrowed money to gamble on stocks.

5. It is rumored according to media sources that July 2nd, the central government ordered the Chinese state media to publish positive opinions about the stock market, not to criticize.

“At the mid-June high, shares on the Shanghai Composite Index were three times more expensive than any of the world’s top 10 markets based on estimated earnings. Even after the recent plunge, the median valuation of stocks on the Shanghai and Shenzhen exchanges is almost triple that of the companies listed on the Standard & Poor’s 500-stock index.” BLOOMBERG BUSINESSWEEK, July 8, 2015.

Not every stock market is the same, nor is every stock the same. For example, the market in Hong Kong did not run up as much as the Shanghai market and is trading at a much more reasonable price level. There are still profitable companies in China. This underscores an advantage that active fund management can have over indexes, they can focus more on quality rather than being forced to own all stocks in an index. We continue to monitor the changing developments around the world.