China stock market crash

chinacrash

China’s stock market has suffered its sharpest fall since 2007.

The Wall Street Journal reports that the Shanghai Composite Index ended down 8.5% at 3725.56, its second-straight day of losses and worst daily percentage fall since February 27, 2007. China’s main index is up 6% from its recent low on July 8, but still off 28% from its high in June. The Shenzhen Composite fell 7% to 2160.09 and the small-cap ChiNext Closed 7.4% Lower at 2683.45.

This follows a three week rally in response to heavy government intervention which has seen a state-owned fund called China Securities Financial Corp. spending hundreds of billions of yuan in supporting the market and 21 brokerages pledging to support the Shanghai index.

The collapse follows the release of data showing that factory profits in the world’s second largest economy fell 0.3 per cent in June and China’s manufacturing activity for the month of July coming in at its lowest level in 15 months.

But the big worry is that the Chinese government intervention is simply unsustainable. It can’t keep doing it forever.

“Today’s rout in China poured cold water on investor sentiment,” Mari Oshidari, a Hong Kong-based strategist at Okasan Securities Group Inc told Bloomberg. “This also revealed the market is still too fragile without government support.”

As reported here, Bridgewater Associates, the world’s biggest hedge fund manager and a long-term bull on the world’s second largest economy, has sent out a note warning that “our views about China have changed as a result of recent developments in the stock market.”

Bridgewater says that Chinese households – which account for about 80 per cent of trading volumes – will be hard-hit by the share market decline, particularly because many households piled into the market when it was at its peak.

Bridgewater also points to the psychological effect of the share market collapse. “Even those who haven’t lost money in stocks will be affected psychologically by events, and those effects will have a depressive effect on economic activity”, it said.

“There are now no safe places to invest and the environment looks riskier, which we would expect to encourage the holding of cash and lessen the marginal effectiveness of easing monetary policy.”

And that could well create instability in China, something the world does not need.

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