Since June 12, 2015, stocks listed on mainland China’s most prominent exchange have fallen 30 percent. This has prompted approximately 1,400 companies, or more than half of those listed in Shanghai and Shenzhen, to file for a trading halt in an attempt to prevent further losses.
Over the course of the same three week period, the even more speculative ChiNext Index has lost 42 percent of its value and strengthen the case for alternative investments.
In early July 2015, government authorities and “private” Chinese brokerage firms/companies announced dramatic measures aimed at prop-up failing stocks. These included:
- Brokerages and mutual-fund companies said they would buy billions of dollars worth of Shanghai shares.
- A state-owned investment firm said it would buy China-based Exchange Traded Funds.
- Regulators have included people’s homes as allowable collateral to buy stocks, suggesting that even officials see real estate investments as a better option.
Albeit the Shanghai stock exchange Shanghai opened up strong (8.5%) on the day that followed Greece’s referendum “No” vote, shares slipped throughout the rest of the day and closed at only 2.5% above. In the two days that followed, Shanghai dropped an additional 1.3%, and 5.9%. In Hong Kong, the Hang Seng Index ended trading down 5.8%, Japan’s Nikkei 225 dropped 3.1% and the Taiwan Weighted fell 2.9%.
According to analysts, the underlying trouble is that, while the Chinese economy has made great strides to establish itself as a global powerhouse, “China’s investing culture remains backward and immature.” It is suggested that when inexperienced investors run into trouble, they panic quickly and try to exit the stock market at any price. These are the same investors that drove the stock exchange up to 5,000, and now with their “irrational selling” and “panic sentiment,” will take it way back down.
Chinese individual investors are not primarily ‘value’ investors. Sky-high valuations don’t seem to faze them. They are primarily momentum investors who buy whatever is moving and sell whatever is falling. – John Mauldin, “Thoughts From the Frontline”
Unlike most other stock markets, where the majority of participating investors are institutional, in China 80% are small retail investors. For tens of millions of ordinary Chinese – like the country’s retirees, investing the stock market allowed them to augment meager incomes, that otherwise would not be able to keep up with today’s rising living costs. Making matters worse, many people borrowed money to invest in stock market shares, which as you would expect will only serve to increase the losses.
Now that this bull market has collapsed, wealth has been redistributed and the middle class is annihilated. – “Ted,” 24 Year Old State-Owned Bank Employee From Nanjing