Never has a stock market correction become a crash. Until today, many investors who invested in the Shanghai market now have the opportunity to watch their assets float like the Yangtze River. The main stock index of the Middle Kingdom is in free fall. Is it any wonder, if last year this index rose by 106% only on promises of prospects for public offerings and the expectation that Beijing will begin a massive fiscal stimulus of the economy.
Expensive to buy, cheap to sell
Since the beginning of the year, the Chinese stock bubble has swollen to an incredible size. Speculators, counting on future cheap credit money, bought shares in large volumes. At the beginning of the year, brokerage firms borrowed more than $ 260 billion for investment financing. By the beginning of this month, this figure had increased by another 100 billion.
Result: today, the cost of these investments is less than the cost of the loan. And traders massively ran from the market to have time to at least pay off their debts. No one thinks about profit anymore. But analysts say that the equation, in which the main variables are the volume of assets sold and the rate of decline in their value, and only the amount of loans is fixed, does not have a positive solution.
Observers say speculators are fleeing like rats from a sinking ship. At the same time, the biggest problems will not be for them, but for those serious investment funds that have dedicated their activities to long-term investments in mainland China. And although Asia is still watching the European market with alarm, where the confrontation between Greece and its creditors is gaining momentum and threatens more and more risks not only to the region but also to the global economy, the true cause of the collapse may not be Hellas at all.
There will be no rapid growth
Investors are also not sure about the economic power of the Chinese dragon. When the middle Kingdom came out of its voluntary isolation in 2001 and joined the WTO, its economic miracle allowed a lot of investors to get rich. And even in the past financial crisis, China has demonstrated its immunity to the global downturn, unlike in Europe and North America.
Low production costs, rapid urbanization, and massive public investment in infrastructure were supposed to bring double-digit growth to the country by default. But over the past couple of years, it has become clear that these expectations are not destined to become a reality. China has planned growth of 7 and a half percent for this year, but analysts say this is too optimistic a forecast.
The trouble is that neither the stock market nor the investors did not take seriously any of these evaluations, speaking about the recession. This means that even the current sell-off can be perceived by many as a market correction.
The stock market is not the only weak link in the economy
Of course, unlike Europe, China still has a lot of leverage, thanks to which it can support the economy for a long time and even probably be able to restore order in the stock market, with its increasing chaotic behavior. And, what to hide, many people hope for this, for promises and opportunities, completely ignoring the pessimistic forecasts.
But if the Chinese market, instead of even a hard, but adjustment, bursts the bubble inflated by speculators, it will turn into a disaster. After all, investors, going broke, will not be able to return to the banks those billion-dollar loans that were taken to play the market. And there is still the problem of a housing bubble. The scenario is classic: the state wanted to support developers and help citizens buy housing. Reduced rates have led to increased demand and, consequently, rapid price increases, often unjustified. We have already discussed what this increase in house prices can lead to.