I haven’t seen a thread on this, and that surprises me. It seems that China is in the process of complete meltdown, unless I’m missing something here. Their stock market has been crashing for a while now, and China has actually frozen stock prices in an effort to force control on their market. Literally trillions of dollars have been wiped out of their stock market in value over the last few months and there seems to be no end in sight. Feel free to expand on or correct anything I’ve got wrong above. I won’t link to stories on the crash itself unless someone wants them, since what I really want to talk about is the effect this will have on the rest of the world. Thus far it’s had only a peripheral effect, as far as I know, on US stock markets.
I don’t know what, if any effect it will have on an already shaky European stock market. And, I assume, as the crisis gets worse it will spread out from China and affect basically everyone. Or, maybe it will be contained in just China? That seems unlikely to me, but I don’t know a lot about how connected all of this stuff is or what effect a Chinese economic meltdown will have outside of China. Or, really, what effect it will have inside of China. I assume China can use some of it’s vast savings to prop things up for a while, at least, but this is really hurting no just the wealthy fat cat party types but every day people, since for the past several years the state media agencies have been urging every day Chinese citizens to invest heavily in the stock market, and many have taken that advice, even borrowing money so they could invest, creating a huge bubble. I’ve heard this described in terms of the Great Depression in the US wrt the events leading up to it and how the government is handling things.
So, economic and financial 'dopers, what are your thoughts on this? How will the affect the rest of the worlds economy, especially the Europeans who already seem a bit shaky? How will this affect the US? What will this do to China, and what can they do about it?
It’s producing increased volatility in the US market. However, some of that is insulated by the difficulties inherent in investing in the Chinese market for those outside of China.
What it IS doing is causing a slowdown of consumer purchases for the Chinese due to fallen confidence. That’s what’s given non-Chinese markets a hard time at the moment.
The fact is that the Chinese market was ungoing an enormous bubble and it appears to be in the process of popping. Like others before them, the Chinese government is discovering that this is a difficult thing to stop once it starts. Collapsing markets tend to be a positive feedback loop and they get momentum until a certain level is reached. Where that’ll be I couldn’t tell you.
Since mid-June the leading stock index of Shanghai has seen a massive downturn (about 32 percent last I read). Analysts seem to interpret this as an overdue correction in an overheated market. The Chinese central bank has made attempts to stop the downturn by massively buying stocks, but the effects of that seem to have only been temporary. Hardest hit by the downturn are Chinese private investors. Over the last year it has become fashionable among Chinese citizens to invest in stocks - often credit-financed.
Impact on Euopean and US markets will be indirect: If the Chinese lose money big time, their private consumption could suffer. That would mean reduced business for companies that export to China.
Note that even with the massive downturn of about 40% over the last two months h the Shanhai index still up around 15% since the start of the year and up about 70% since this time last year. Basically as Hiker said its just a big bubble that burst. The only people who really got hurt were those who invested just before the crash.
The real question is, will this lead to civil unrest, protesting, riots etc inside China? Because if that does happen and it disrupts the supply chain for all those companies that depend on Just in Time shipments from China it will massively disrupt the global economy. Lets see.
China has been on an economic run that’s remarkable by any standards, with growth figures above 7% annually for well over a decade. Of course they had the advantage of starting out with much of the country barely above medieval standards. Introduce modern technology, liberalize markets and laws somewhat, allow a bit of foreign investment, and growth is bound to occur.
Some people believe that China’s current hybrid of communism and capitalism is brilliant, and better than what we have in America. (Ahem) But it isn’t. Growth figures aside, China is much poorer than the USA, and suffers from lots of bad governance. You can read about ghost cities that no one lives in, trains that no one rides, and airports that no one flies into or out of. So massive wealth is being wasted, a huge wave of bad debt appears to be on the horizon, and the government is attempting to hide the problems.
Other people believe that China’s economy will come crashing down at any moment. I’d say that every single day for the last 15 years, you could find a prediction in some newspaper or magazine, explaining why the end of China’s boom is finally here. None have been right so far.
I’m not a businessperson and lack any expertise, so I won’t predict what will happen in the near term. I will say that China’s economy is still basically communist, although obviously much better than in Mao’s time, or even Deng’s. Fundamentally centralized economic control is always bad. It’s wasteful, it produces bad priorities, it requires censorship and repression and human rights abuse. Right now, as you said, the Chinese government is desperately intervening to prevent a stock market free-fall. In the short term, they may keep the market from falling through the floor. In the long term, this is bad. It creates uncertainty and fear. It prevents stocks from being evaluated correctly. It’s a perfect example of why centralized control can’t function forever.
I haven’t studied it, so feel free to correct me if I’m wrong, but:
As others have said, the Chinese stock market has been massively overvalued for a while. If I remember right, we’re talking PE ratios in the 100+ range, compared to US values in the 20s to 30s range.
The Chinese stock market is much smaller than the U.S. market.
It operates more like a gambling emporium than as a stock market (not that that hasn’t happened in the U.S.).
It’s worth remembering that, while individuals may lose money in a crash, a stock market crash has no effect on the amount of money in the economy as a whole.
The problems with a crash are 1.) the wealth effect: if people feel poorer, they reduce spending; and 2.) gambling with borrowed money. If enough people lose enough borrowed money, they’ll default on their loans. It wasn’t so much the 1929 stock market crash, as the subsequent bank closures (and the failure of the Fed to do anything) that kicked off the Great Depression.
Anyway, while I’m ready to stand corrected, I doubt that the Chinese stock market crash will cause major economic problems in China, much less the rest of the world.
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It’s worth remembering that, while individuals may lose money in a crash, a stock market crash has no effect on the amount of money in the economy as a whole.
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It’s all connected, though. Not only is the Chinese stock market tanking, but their real estate and housing markets are down something like 18-20% (and make up a HUGE portion of China’s GDP) and their metal markets are also tanking. The losses have been pretty staggering…I don’t believe that the US could simply shrug off several trillion dollars in losses.
China is in the midst of major economic problems already, and it doesn’t seem to be getting better. As I said up thread, I don’t know what effect it will have on the rest of the world, but I doubt it will pass without a ripple since China is the second largest economy in the world, only behind the US. I understand that China doesn’t allow the same level of economic connectedness into China that the US allows into the US, so a major economic issue in China isn’t going to have the same effect if it happened in the US, but hard to believe that such a major hit on China wouldn’t have any effect at all on the rest of the world…it’s pretty obviously, however, that it IS having a major effect in China already, though.
[QUOTE=ITR champion]
Everything you’ve said is correct. Some folks are predicting worse to come.
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Yeah, was watching this YouTube video from Bloomberg also, and seems pretty grim.
The other thing I’ve seen a lot of folks mention is that in the past the Chinese government would get around issues like this (when they weren’t simply cooking the books) by embarking on large building projects. This lead to a lot of other medium and long term issues, but in the short term it helped a lot. For some reason that I’m not totally sure I follow (I mean, I understand why it’s a bad idea, just not sure why they see that now), the current Chinese government however is reluctant to go to that particular bag of tricks this time.
Yeah, I hear a lot of folks remarking about the market being down 40%, and if were down 40% from where it was 5 years ago, that would be one thing. But it’s only down relative to where it was a month or so ago, and back to the level it was at just a month or so before that.
As of 4:30 pm ET this date, the Shanghai Composite Index:
[ul]
[li] 5 Day -8.83%[/li][li] 1 Month -14.36%[/li][li] 3 Month -18.17%[/li][li] YTD 13.24%[/li][li] 1 Year 67.78%[/li][/ul] http://quotes.wsj.com/index/CN/SHCOMP
Ok…a friend of mine suggested I watch thesetwo YouTube videos from a channel called China Uncensored to get some insights on what’s going on, how it happened and what it means. The first one is the shorter one, the second one a bit more detailed. The guy doing the videos seems fairly knowledgeable to me about China, but he’s going more for laughs than real meat. Still, the videos do explain quite a bit and fill in some of the gaps I had. It seems that this will be mainly internal to China (unless there is a political meltdown, which doesn’t seem beyond the realm of possibility) and won’t affect the US or Europe much, if at all due to low foreign investment in China’s stock market. The stock market, as a poster up thread noted, is pretty much disconnected from China’s economy by and large, and does seem more a gambling than investment thing in China. However, the Communist government is in neck deep on why this is happening and a lot of folks are pretty pissed, since the Communist government seems to be mainly responsible for the bubble, having been telling the people to invest in a ‘super bull’ Chinese market…which, of course, everyone then did, thinking the Communists were backing everything and what could go wrong?? The government is in panic mode at this point, and doesn’t really seem to know what to do, and they are doing a lot of short term damage control which will probably make things worse down the line. Since, again as noted up thread, most of the people investing in the Chinese stock market (80%+) are individuals, instead of investment companies, the majority of this is falling on them. And since they are individuals without a lot of experience in the stock market, having been told by their government to invest and that it was a sure thing, they are also panicking. Since a lot of these people aren’t particularly rich, and a lot of them have actually borrowed money TOO invest, and since they aren’t investing for the long run but to get rich quick, it’s all coming apart.
At any rate, watch the videos if you want more details. I’ve tried to condense them, since I know how much folks hate drive by links that don’t say anything about what you are clicking on. Personally, I’m really getting into watching this guys channel as he has a lot of information in a funny and ironic format on China and seems, to me at least, to be fairly knowledgeable.
Several people have already pointed out that the China markets are actually up for the year. ISTM that those predicting Chaos and Destruction should at least address this fact.
That ignores growth projections, which are a huge part of stock market valuations.
My father thinks so. His feeling is that the the leadership in China can afford to take a much longer term view than the leadership in America, where politicans are always focused on the next election.
It doesn’t make any sense to say “growth figures aside”.
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Several people have already pointed out that the China markets are actually up for the year. ISTM that those predicting Chaos and Destruction should at least address this fact.
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Well, they are up for the year because the Chinese (Communist) government has been using it’s state run media to encourage people to invest in the stock market. I can’t even think of a witty but cutting analogy for that, since it’s not something that governments usually do.
The thing is, that the Chinese (Communist) government has put a lot into that encouragement, and it’s hurt a lot of people through their ‘advice’, which weakens them. And they are none to stable lately anyway. So, it COULD be Chaos and Destruction, but not simply because of the stock market crash. As with a lot of things in China, it’s complex.
He should really watch some of those China Uncensored videos then to get a different perspective. I think that this crash, if nothing else, pops more than one bubble, the other being that the Chinese take a longer view and are focused on the long term or has some sort of vision. They don’t and aren’t, and I think this even is showing that the emperor really doesn’t have any clothes.
[QUOTE=XT]
He should really watch some of those China Uncensored videos then to get a different perspective. I think that this crash, if nothing else, pops more than one bubble, the other being that the Chinese take a longer view and are focused on the long term or has some sort of vision. They don’t and aren’t, and I think this even is showing that the emperor really doesn’t have any clothes.
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This SHOULD have read ‘the other being that the Chinese Communist government/party takes a longer view and are focused on the long term or has some sort of vision’. :smack:
There are always new frontiers of ecological damage they could do! Or, they could build this underwater rail way to the US!
But yeah…that’s the kind of thing they were trying to ‘fix’ by shifting people over to the stock market. You cool down your over-heated real estate meltdown by encouraging a huge stock market bubble! I mean, seriously…what could go wrong??
But that doesn’t make the recent decline into something that it’s not. It’s still a relatively minor correction, in the overall scheme of things.
The only thing your assertion (if true) changes is that you’re claiming even at the lower price it’s still overpriced due to government manipulation. Time will tell on that, but it’s just a prediction. In sum, at this time, the Chinese stock markets are still at pretty high levels.
