The price to earnings multiple of Shanghai-listed companies averaged 32 in mid-June, near bubble territory.
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But for the past few weeks, the slide in the markets has been frightening.
“While there are disaster victims everywhere in China’s stock market, the other scene is that the “national team” is truly taking action”, the paper said.
The tone for trading was once again set in China, where stocks notched their biggest daily gains in six years. If you buy stock on margin and prices fall, your broker can demand more collateral to back your loans. I cannot blame anybody but myself. A recovery may restore some of the lost value, but even if it does, many Chinese families will now be feeling very burned indeed. This is particularly the case when that government, which claims to be seeking out the “manipulators” responsible for the extreme behaviour of the markets, has itself been systematically manipulating those markets. During a big selloff, things can get really weird.
Shares of Walgreens Boots Alliance (WBA), the largest USA drug store chain, jumped 4.2 percent after the company raised its full-year profit forecast. Within four months that 100,000 yuan turned to 260,000 (€37,750).
“Now I am deep under the water. If you’re just sourcing, it is probably a net benefit”, said Steve Marotta, analyst with CL King & Associates. “They’ve seen so many government organizations making huge efforts”.
And late Wednesday, China’s securities regulator said that holders of more than 5% of a company’s stock would be barred from selling for the next six months, which may have contributed to Thursday’s rally.
And then it did.
Before Chinese shares started their tumble in June, they had risen an astonishing 150 percent over the year. These statistics have caused alarm, especially at a time when people are already frantic at the possible impact of Greece’s financial woes. At 6.30am (AEST), the currency is trading at US74.61c, below Thursday’s local close of US74.77c. Chinese nationals have borrowed more than $360 billion (€324.5 billion) through worldwide debt securities, from both bank and non-bank sources.
How can that be, this is surely, from any perspective, the time to panic on China, right? The recent stock market tumult has created a crisis that could precipitate into a broader economic disaster. That means almost one-third of the market’s total value has been wiped out. Shapiro describes the Chinese economy as “largely insulated” and “walled off” from markets in the US, Europe and beyond. These smaller investors built positions hoping foreign investors would flood the market, with the Chinese regulator easing the norms for foreign investment into shares listed on the Shanghai and Shenzhen stock exchanges last November.
There are wider concerns about the way in which Beijing intervened to support the market, as it casts doubt over the government’s pledge to introduce more market liberalisation measures – the centrepiece of its economic reform agenda.
“The scale and aggressiveness of these measures make a mockery of the leadership’s claim to allow the market to play a “decisive role” in determining the allocation of resources and the direction of the economy”.
Analysts generally are more relaxed about the outlook. This is likely to result in a complete crash of the market. Market volatility isn’t new in China, but this decline has been pronounced. There is no shortage of liquidity. The Shanghai Composite rose 5.8% after posting losses in eight of the last 10 trading days. What melts up usually also melts down.
In Hong Kong, the Hang Seng Index also gained 3.73%, while the China Enterprises Index was up 3%.
Li Daxiao, chief economist at Yingda Securities, believes there are five reasons for the crash.
By Wednesday, US stocks had fallen sharply due to recent events, including the market turmoil in China, a rout in commodity prices, the Greek crisis and a major outage on the New York Stock Exchange spooked investors.
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And he notes that most investors are still ahead on their investors.
