Chi­nese stock plunge con­tin­ues

In­vestors still ex­pect U.S. im­pact to be lim­ited

Cape Breton Post - - BUSINESS -

Chi­nese of­fi­cials are scram­bling to stop a plunge in the coun­try’s stock mar­ket, shut­ting down half of its mar­ket from skit­tish in­vestors and forc­ing bro­ker­ages to pony up bil­lions to prop up shares.

The Shang­hai com­pos­ite lost another 5.9 per cent Wed­nes­day and is now down more than 30 per cent since peak­ing June 12.

The im­pact on Chi­nese in­vestors is di­rect, but for in­vestors in the U.S., Europe and else­where, it’s not as sim­ple. China’s mar­ket is largely iso­lated from other world ex­changes, but there are wor­ries the fi­nan­cial dam­age could hurt the broader Chi­nese econ­omy, which is the sec­ond­largest in the world.

Here’s what has hap­pened: HOW DID THE BUB­BLE BE­GIN? There have been signs of over­heat­ing in China for a while. Shares in Shang­hai more than dou­bled over the past year, de­spite ev­i­dence the Chi­nese econ­omy is slow­ing. Chi­nese eco­nomic growth fell to 7 per cent from Jan­uary through March, the slow­est quar­ter since 2009. At the same time, state-owned media has en­cour­aged or­di­nary Chi­nese for months to load up on shares. Many bor­rowed heav­ily to buy stocks, tak­ing out so-called mar­gin loans.

Ris­ing stocks en­cour­aged com­pa­nies to raise money by is­su­ing shares and to use the pro­ceeds to pay down debt. In the first half of the year, the Shang­hai stock mar­ket led the world in ini­tial public of­fer­ings: 78 com­pa­nies is­sued shares in Shang­hai, rais­ing $ 16.6 bil­lion, ac­cord­ing to a study by the ac­count­ing firm EY. Hong Kong was No. 2 with 31 deals that raised $ 16 bil­lion. Shen­zhen was No. 5 with 112 deals that raised $ 7 bil­lion.

Now an­a­lysts say the flood of new shares is over­whelm­ing the mar­ket and help­ing to push prices down. More­over, the gov­ern­ment be­gan to worry the mar­ket had reached dan­ger­ous lev­els, and Chi­nese reg­u­la­tors have started to tighten rules on mar­gin lend­ing. WHAT HAS THE CHI­NESE GOV­ERN­MENT DONE TO CON­TAIN THE IS­SUE? Af­ter hit­ting a peak last month, Chi­nese stocks have been in free-fall. Orig­i­nally, in­vestors in China and abroad treated the selling as a much-needed re­lease from a mar­ket that had soared 150 per cent over the past year.

As the losses have deep­ened, though, wor­ries have in­creased and of­fi­cials have taken di­rect ac­tion to stem the selling. Over the week­end, 21 Chi­nese bro­ker­age com­pa­nies an­nounced they would cre­ate a $19 bil­lion “mar­ket sta­bi­liza­tion’’ fund, and would con­tinue to buy Chi­nese stocks. Any com­pa­nies who were go­ing to go public sus­pended their plans.

The selling con­tin­ued, so Chi­nese of­fi­cials an­nounced that ma­jor share­hold­ers in com­pa­nies and ex­ec­u­tives were banned from selling their hold­ings for six months. HAS THAT SLOWED THE SELLING? It’s ac­tu­ally made things worse. The selling has not stopped, and now it is af­fect­ing Asian mar­kets like Hong Kong and Ja­pan. U.S. stocks also fell sharply Wed­nes­day.

Most anx­i­ety- rid­den in­vestors have turned to purg­ing stocks that act as a proxy or have di­rect ex­po­sure to China, with most of the dam­age hap­pen­ing in Hong Kong. The ter­ri­tory’s Hang Seng in­dex dropped 5.8 per cent Wed­nes­day, its worst one- day drop since the fi­nan­cial cri­sis. The Hang Seng China En­ter­prise In­dex, which is an in­dex of so called “H- Share’’ com­pa­nies, or main­land Chi­nese com­pa­nies that trade in Shang­hai and Shen­zhen as well as Hong Kong, fell 6.1 per cent. ISN’T CHINA’S ECON­OMY HUGE? SHOULD I BE WOR­RIED?

The ex­po­sure that U. S. in­vestors have di­rectly to Chi­nese stocks is lim­ited. Out­side in­vestors have only been able to ac­cess the Chi­nese stock mar­ket since Oc­to­ber, and that re­quired pur­chas­ing stock in Hong Kong. To buy di­rectly in the Chi­nese stock mar­ket re­quired a spe­cial li­cense.

The lack of ac­cess has made it dif­fi­cult for in­vestors, in­clud­ing U.S. fund man­agers, to get ex­po­sure to the Chi­nese stock mar­ket.

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