China stock market crisis: no one can yet say if Beijing's action has …
Investors look through stock information at a securities firm in Haikou, Hainan province, on Friday. Photograph: Zhao Yingquan/Xinhua Press/Corbis
As the east coast of China was put on high alert for the approach of super-typhoon Chan-hom, it was not clear whether the financial storm that has rocked the country’s stock markets had blown itself out.
Share prices rebounded to record their best two days since 2008, but many individual investors would still have been nursing big losses after the Shanghai Composite Index plunged nearly a third since its mid-June peak.
It is a running joke that no one starts their real job until 3pm, when the markets close
That plunge came after the index previously jumped by 150% in a year from June 2014 until mid-June this year, drawing in up to 1.4 million new investors every week to bet on soaring prices.
The precipitous fall also caused worries it could spill over into the global economy. On Wednesday, before Beijing played its strongest card to stop the rout, Asian shares slid to a 17-month low and Hong Kong’s Hang Seng index suffered its worst day since 2008. The Australian dollar fell to a six-year low against the US dollar over fears of the effect on its mining-heavy economy.
Playing the stock market has become something of a national pastime in China and 85% of those investing are individuals rather than institutional investors. It is a running joke that no one starts their real job until 3pm, when the markets close.
Many of China’s small retail investors have borrowed money to invest as it is relatively easy to do so under the system known as margin financing.
Investment bank Credit Suisse estimated that 80% of China’s urban households have put money on the stockmarket in a major shift of household savings from bank accounts to brokerage accounts.
Painful losses and panic selling among these millions of small investors has led to concerns about the potential for social instability. “I think social stability is at stake,” said Dong Tao, an economist with Credit Suisse in Hong Kong. “China has one of the highest ratios for retail investor participation. That is a significant issue and social stability is one of the concerns the government has and why they want to act quickly to stop the panic.”
In one of the most drastic of an escalating series of measures, Chinese regulators banned major shareholders in companies from selling their shares for the next six months. Then reports emerged on Friday of police and regulators investigating evidence of potential “malicious” short selling of Chinese shares – selling borrowed shares in an attempt to drive down the price and profit by buying the shares back once they have fallen.
Related: Why is China’s stock market in crisis?
The rebound, when it came, was dramatic, but Dong was cautious about the longer term effect. It will take some time before anyone can say Beijing’s action has been successful. “Whether the measures are big enough, strong enough to stop the panic, I don’t know. But the government has shown a strong determination to make it work.”
There has been debate about whether the government should have taken any action at all. “They have staked their political credibility on something that they may be able to do, which I think is unwise because I don’t think it was necessary,” said Patrick Chovanec, chief strategist at Silvercrest Asset Management.
Christopher Balding, professor of economics at Peking University, said the authorities may have exacerbated the crisis with heavy handed action. “People in China got a lot more scared because of what the government is doing. They took a small problem and acted on it and made it a bigger problem,” he said.
There has been criticism of Beijing’s tactics in the media, with the highly regarded Caixin magazine publishing an opinion piece that argued only a systemic risk that threatened financial stability justified a government bailout.
“Government intervention disturbs the price discovery process because it unifies investor expectations and encourages them to make the same choice,” the magazine said. “In this scenario, investing becomes gambling on the government’s actions.”
Many analysts believe the dizzying rise of share prices over recent months made them overvalued. There are few who think the markets will get back to the unrealistic levels they reached in early June.
“I think ultimately they will go back down. The Shanghai index will go back down to somewhere around where it started,” said Chovanec. He expected it to be a drawn out process. “The last time it took 12 months for that to happen,” he said.
But if a plunging stock market has caused financial pain in millions of households and alarm in Beijing, it appears divorced from the course of the wider economy. The massive gains in the markets in the past year came at a time when growth has been slowing to its weakest pace since before the financial crisis.
Chen Jiahe, chief strategist with Cinda Securities, said a stock market crash did not pose an immediate threat to the wider Chinese economy and did not believe China was heading for a meltdown similar to the US crunch that precipitated a global financial crisis in 2008.
“The leveraging in China’s equity market is still quite low compared to the leveraging in most other markets like the United States, especially when you compare it with the [US] sub prime crisis and the 2008 global financial crisis,” Chen said.
But Dong believes that does not mean the stock market rollercoaster will not have an effect on the wider economy. “The length of the market correction matters more than the depth,” he said. “If it drags on, people might start to feel poor. It is too early to quantify how it is going to effect consumption.”
“There is an enormous amount of fear in the market,” said Balding. “As long as there is that level of fear in the marketplace and that level of fear among policymakers, that is not the type of atmosphere that is going to promote a sustainable recovery,” he added.
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China stock market crisis: no one can yet say if Beijing's action has …
