The Chinese domestic market plunged by 30 per cent a week ago, prompting panic about a possible collapse. But it seems fears for the worst have subsided, for now.
It's been called the 'Great Fall of China,’ $4.5 trillion dollars worth of assets wiped off the Chinese stock market in less than one month. Years of savings, retirement egg and tuition money were lost in market freefall, leaving legions of bewildered Chinese wondering what went wrong.
A few months ago the stocks were soaring. The majority of those trading shares, many who had never finished high-school, were delirious with joy, watching their assets climb every few weeks or even days. They didn’t need a degree, didn’t need to research, they didn’t even need to actually have money, as that could be easily borrowed. All they had to do was check their smart-phone.
Except a few days ago, when they did, they didn’t like what they saw. Lottery-shop owner Evan Zhang had a front row seat. “You could really tell from the look on their faces if they traded stocks or not. You knew whether they had shares,” said Zhang. His business in central Beijing has been booming since the market fall, with customers keen to reverse their fortune. With 40 per cent of his savings invested in stocks Zhang was also hit, but considers himself lucky compared to some of his customers who lost everything. “Most of my customers traded stocks because they’re into this kind of short-term gambling,” he added.
Analyst Charles Liu says it’s precisely this kind of behaviour which inflated the Chinese equity bubble. He’s invested in the Chinese stock market since 1990 and says many of those who bought stocks in recent months were more like speculators than investors. “It was too easy, since the boom begun sometime in the middle of last year. It was as if anywhere you threw money it would double in three months, four months. Sometimes two weeks! Making a get-rich quick scheme that’s actually very detrimental to the overall economy,” said Liu.
According to Liu securities regulators turned a blind eye to shadow lenders, who were engaging in excessive margin lending, saying “six to one, seven to one, eight to one leverage, on margin, which is very very risky, to the point of absurd... China’s securities regulatory agency may not have handled everything as well as they could have.”
Though Liu attributes much of the crash to the majority “unsophisticated investors,” well-educated and experienced shareholders were also hit hard by the fall. Marketing manager Henry Ling started trading Chinese stocks in 2008 and earlier this year started a social media network for other young professionals invested in the stock market. “We help each other, give advice via our smartphone chat application. When I have time I check it every ten minutes, and within that short time there will be so much discussion I have missed,” said Ling.
When the crash happened his friends on the network sought his insight into a disaster that seemed to make little sense. “Some of my friends had put 70 per cent of their savings in stocks. One lost 1 million renminbi ($260,000 Australian dollars)”.
Charles Liu was less surprised by the news. “The Chinese capital markets, or the stock market in general, had been booming at a way that is first irrational. It’s worse that irrational, exuberant,” he said.
But just when Henry Ling and friends were beginning to fear total collapse, Beijing rolled out a raft of aggressive measures to stabilise the economy. These included the banning of short-selling, a temporary freeze on new IPOs and the suspension of half of the country’s domestic trading market. The results were fast – if not unexpected, delivering the Chinese market’s best 2-day gain in seven years.
While many western commentators decried the move as desperate, artificial and heavy-handed, many in China breathed a sigh of relief.
“In my opinion I think it's positive,” said Henry Ling. “These past eight years this situation never happened, the government released so many policies to stabilise the market. This is the first time. This time the government wants to save the economy, not the people, save the country's economy. So in this way I’m confident about the future.” He says while some friends have vowed never to return to the market, most are willing to remain shareholders, even if that means not seeing any major returns within ten years.
Evan Zhang was equally buoyed by the boost, saying he would continue to trade stocks while running his lottery shop, mostly because he trusted the government’s ability to balance out and grow the economy in the long term. “I’m not put off, I’ll continue because I believe in this economy!” he said.
Though he regrets that the intervention may mean that long-awaited market reforms such as the internationalisation of the RMB and the opening up of the capital account may be delayed even further, Charles Liu agrees that the Chinese economy will return even healthier. “I think actually it’s a good thing, what happened. There are a lot of unintended consequences and collateral damage of course… But a lot of the toxic stocks may be weeded out,” said Liu. Continuing, “It’s the beginning of a new round, what the Chinese government would like to call a slow bull – instead of a charging raging bull.”
