China’s Chaotic Market

As the world watches, the nation’s government tries to end the downturn. 

Investors worldwide worry about the state of China’s equity market. You could argue that these fears have impacted Wall Street as much as the crisis in Greece.

The recent ups and downs of the Shanghai Composite (SSE) have been startling: the 16 trading sessions from June 17-July 9 included daily losses of 6.42%, 7.40%, 5.77%, and 5.90% and daily gains of 2.48%, 5.53%, 2.41%, and 5.76%. To put that in perspective, imagine the S&P 500 gaining or losing 50-130 points a day or the Dow falling or rising 500-1,200 points per session.1     

The SSE is now in a bear market – it sank 24% between June 12 and July 4. Before that, it was up a dizzying 149% YTD.2

Is the summer slump in the SSE a measure of lost confidence in China’s economy? If so, will Chinese demand for oil, coal, and other imports weaken even more? The volume of imported goods to China fell 7% from Q1 2014 to Q1 2015.3  

China’s government has taken some extraordinary steps to appease investors. Its actions make the Federal Reserve’s 2008 rescue effort look conservative.

Back then, the Fed bought mortgages and securities. The People’s Bank of China is putting its money into equities. It just created a 120-billion yuan ($19.3 billion) market-stabilization fund that the nation’s leading brokerages will use to invest in the largest SSE-listed companies.5,6

On July 8, the China Securities Regulatory Commission barred anyone owning more than 5% of a company from selling their shares for six months. Days earlier, Chinese officials suspended all IPOs, anxious about potential cash outflows from existing SSE-listed firms.4,5

The China Banking Regulatory Commission is now letting lenders roll over loans backed by shares – and it has publicly stated its support for banks extending credit to exchange-listed firms doing buybacks. Meanwhile, the CSRC is embarking on an effort to crack down on “malicious” short selling.2,4

Essentially, Chinese are being told that there is no downside to investing in equities – at least for the moment. (The Chinese government has even urged people to buy shares out of patriotic duty.)2

One major problem has emerged after all this: a shortage of liquidity. Only about half of Chinese firms are trading at the moment.2,4   

To some observers, these measures look like overkill given that equities amount to less than 15% of the net worth of Chinese households. (Real estate has long been the favorite investment of the nation’s rising middle class.) To economists and Wall Street analysts, these efforts are welcome correctives needed to soothe global investors as well as Chinese investors.6  

The profile of the Chinese investor is changing, and it is changing in a way that might unnerve investors elsewhere. Less than 7% of Chinese own equities (90 million out of 1.36 billion people), but more are entering the market; in May alone, 12 million new retail accounts opened on Chinese exchanges as the SSE surged north. Who are these new investors? Some are college students. The Atlantic reports that 31% of Chinese university students now own equities, about three-quarters of them investing with mom and dad’s money in the process. Others lack higher education – of the Chinese households that opened investment accounts in Q1, only about a third were even headed by high school graduates.2,7

Investors have yet to bail out. Even with its economy slowing and its market rollercoastering, the opportunity China presents is just too great to ignore. Lipper reports that retail investors have directed $3.4 billion into China-focused investment vehicles YTD, representing the largest first-half investment since 2009. While that inflow might weaken or reverse itself in the wake of China’s biggest selloff since 2008, international diversification has its merits – and institutional investors may see a buying opportunity. As fund manager Yu Zhang told Reuters, “We’re not sure how long this volatile period will last, but to me the medium- to long-term outlook for China is still trending up.” 8    

Citations.

1 – investing.com/indices/shanghai-composite-historical-data [7/9/15]

2 – theatlantic.com/international/archive/2015/07/chinas-nervewracking-stock-market-collapse/397724/ [7/4/15]

3 – tinyurl.com/ntrfw3w [5/25/15]

4 – forbes.com/sites/gordonchang/2015/07/09/china-making-stock-declines-illegal/ [7/9/15]

5 – businessinsider.com/china-suspends-ipos-2015-7 [7/4/15]

6 – tinyurl.com/psnwgpc [7/7/15]

7 – data.worldbank.org/indicator/SP.POP.TOTL [7/9/15]

8 – tinyurl.com/nvmus8j [7/9/15]

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Verizon, Bank of America, Merck, Pfizer, Northrop Grumman, Glaxosmithkline, Raytheon, ExxonMobil, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Patrick Ray is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

Advertisements