Recently there’s been a big plunge in Shanghai Stock Exchange’s Composite Index. The news echoed loudly in the West, and this was followed by gloomy forecasts of Wall Street speculators, that lasted until the financial storm that rocked Chinese market, blew itself out. In this article we’ll try to explain what really happened on Chinese stock market and how is this going to affect the world’s economy.
First it’s important to note that Chinese financial rollercoaster didn’t last long. Immediately after the market crash, officials in Beijing launched counter-measures that supported the market and stopped further crash of Chinese stocks. This was even confirmed by some American companies that do business on this market like Goldman Sachs. They were one of the first who reported to the Western media that the crisis is over, and that they’re ready to move on.
China’s Casino Stock Market
Chinese market recently became one big casino since between five and six percent of China’s 1.4 billion population started buying stocks and playing on the market. Stocks became much better way for them to save money than saving accounts or real estate purchases. This growing trend among small investors did great for Chinese economy, but it also made its stock exchanges much more vulnerable.
Individual accounts on Shanghai and Shenzhen stock do more than 80% of the overall trade, but in spite of that, this capital only represents 32% of Chinese overall GDP, unlike in United States where it takes more than 123% and all other developed nations where this figure is at least 100%. With this in mind we can be sure that the crash didn’t have too much influence on Chinese or world economy, since losses on Shanghai and Shenzhen exchange markets are going to affect only 30 million of Chinese families. These are mostly upper-middle-class or sometimes even very wealthy families so the overall consumption in China is definitely not going to drop significantly. The only consequence of this crisis may be that individual investors in China are going to become little more prudent in the future, which is actually a good thing for stopping similar scenarios from happening.
Chinese Government Measures
In last few decades Shanghai became the new Hong Kong. This city became Asia’s top business capital and next thing that was planned by Chinese officials is establishing Yuan as a true global currency. For this to happen, Beijing spent a lot of financial and political capital and they’re definitely not going to let it all go after some minor plunge on the stock market.
That’s why measures of Chinese government were so radical in this case, and a lot of Western experts are now asking, how these are going to influent Chinese market in the future. Government measures were brave and bold and they included stopping shareholders with more than 5% shares in one company to sell their stocks for six months period. Government also injected more than $14 billion into the money market and until today these measures have proven to be very effective in continuing China’s economic growth.
Although many Wall Street speculators presented bold measures of Chinese government as a precedent, these measures are very similar to the ones ordered by Federal Reserve during 1987 stock market crash, known also as the Black Monday, which was caused by cash settlement maneuvers made by market manipulators. After the FED intervention in 1987, market manipulators needed to reverse their position in cash settlements which brought stock market back to its feet.
Chinese government measures are not much different from the ones FED took in 1987, and since People’s Republic is still considered to be a socialist country, we can expect similar government measures in the future, when ever we see high stock market index plunge. So the bottom line of this story is that Chinese economy is going to grow even further, and the other world economies won’t be affected by its latest crash. So, should we be genuinely worried about the China’s stock market crisis? No, we should not!