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What have caused China stock market collapse?

China Stock Market Collapce

China stock exchange lives as if in different worlds. This can be seen, if we compare the dynamics of indexes with the GDP dynamics. For example, in 2001-2005 the market fell by 55%, while GDP grew by almost the same factor. In the crisis of 2007-2009, the index fell 72%, but the economy continued to grow at double digit rates.

The behavior of the market was untethered from reality at this time too. For the 12 months beginning in June 2014, when the indices in Shanghai and Shenzhen were experiencing the wild growth, Chinese GDP grew by 7% and the market by 150%. Indicators like price/earnings, in the spring of 2015 “shouted” that Chinese securities are wildly overvalued, and the huge bubble is inflated in a market. And yet people were carrying their money to the China stock market – only in May 12 million new brokerage accounts were opened in these two major cities (now their number has exceeded 90 million).

The Chinese retail investors’ madness, that drove quotes to heaven, is understandable: millions of households have nowhere to invest. Because of the state monopoly in the banking sector there is no competition for borrowers; "Big Four" state-owned banks and others are traditionally occupied by the fact of offering deposit rates almost at the level of inflation to the public, and then lending cheap money to the state companies. Putting at the beginning of last summer's money on Deposit in Chinese Bank, you could get to 2.75% per annum, whereas purchasing an index Fund would give 150%.

China Stock Market

Because of the continuing incomplete convertibility of the yuan investing in currency is difficult – legally you can not buy more than $50 million per person per year. Investing in foreign securities is available only to institutional investors, and only within the framework set by the government quotas under a special scheme QDII (in June in these funds was only $9 billion).

In the end, the wealthy Chinese had only three main tools for preserving and enriching lessons: real estate, China stock market and various non-transparent schemes for which "financial trusts" lend in a variety of high-risk projects (it's often just a credit to private companies, which are unable to obtain a loan in the state bank). "Financial trusts" is a relatively new tool for China. So the usual selection of wealthy Chinese returned to two familiar options: to carry the money in exchange or to buy an investment apartment.

The fact that the stock market bubble was about to inflate was visible to the naked eye for several months. It was written by the banks in the reviews for their customers. The world's media began to write about it in April and May. But the financial authorities in China did nothing to deflate the bubble, and even, on the contrary, helped it to inflate. The people's Bank of China was gradually reducing the interest rate. Regulators loosened requirements for margin lending. These signals could be easily interpreted by the market professionals or even people with a basic level of financial literacy.

The largest China stock exchange fell on the first trading day of the year that resulted in the pulling the “trigger”, which has for the first time suspended a nationwide stock trading. Investors interpreted the report's findings as confirmation that China's economic growth slows down. And that is a particular reason, which caused China stock market collapse by the terrified traders.

By Chieffinancing 25.07.2016

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