The entire world news are eyeing developing activities over Greece and its suspense regarding its Euro Zone membership. Very less attention is given to a significantly more threatening thing which is going in Chinese markets have fallen around 30% since June 2015. The situation in China are equally comparable to America’s 1929 Great Depression.
Nobody noticed but something was fishy going on in Chinese Markets since June 2014, where markets started booming but where is the economic growth to back up the booming stock prices ???
Answer lies in Chinese government going less strict on it market regulations. China was known for it strict regulation on margin trading which allowed very less opportunities for leveraged trading. however more than a year back government had loosen up on it margin rules.
Now what is Leverage trading? It is borrowing money to invest in stocks. When economy is doing good and markets are booming, leverage helps to gain more return on own funds.
With recent economic boost packages provided by China to revive its economic growth infused ample liquidity into the market and with relaxing on strict margin trading the funds was directed towards stock markets. The leverage trading presently in China is more than USA. When stock reached its peak in June 2015, people had bought 2.2 trillion yuan ($350 Bn) of stocks with borrowed money.
Wealth Managements Funds started giving more returns from their historical trends. This put pressure on Chinese Bank to provide competitive rates on deposit. For which bank have taken much riskier lending and their exposure to real estate sectors and other high risk high return sectors had increased. In order earn high returns the bank have provided loans to wealth management companies which again got invested in stocks and also the banks themselves have invested depositors money directly into stocks.
Literacy rate in China had increased over the years and people are aware of investing into stock market with even the less literate masses seeking to earn from the stock market boom. Further with government encouraging stock market investments retail investors having shooted-up in past one year. Over 40 million trading accounts were opened during last one year.
On account of the above developments, the Chinese benchmark index had increased over 150% in last one year which reached its peak in June 2015. This unprecedented move up in stock markets had catched attention of regulators in China. Regulators were aware of the fast developing bubble and they levied certain restriction on margin debt again in June 2015. This move actually pinned the bubble and thats when the market started falling steeply.
On Monday morning 6th July 2015 the steeply declining indexes compelled regulators to suspended trading of shares of around 940 companies which accounted for 40% of market cap which also failed to curb the fall. And then in a desperate move government had to restore its earlier relaxed policy on margin debt on Wednesday 8th July 2015. Further, it had restricted larger Investors and Corporate Executives of Companies from selling the stock for six months.
This time along with financial risk the matter was more Political. Approximately China has more than 90 million stock investors/trader now actively invested. These include common mass, friends, relatives of Political leaders. Now if these people loose their money in stock which was earlier encouraged by government the it would like disappointing them. This may inflict them to demand change in Government. (Government is more creating more mess to cover up the the mess which is already created). But what after 6 months till how long the government can support the markets ???? Are we heading to more worse situation than 1929????? Do think before you blindly invest in market on barbers advice 😉