Chinese Stock Market Dreams Torpedoed

Individual investors in Chinese stock markets face the harsh reality of seeing their investments taking a nosedive and losing more than 50 percent of their previous 2015 values. Things have come to such a point that the every day investor would simply like to have his old principal amount of money back. However, the signs of Shanghai Composite Index reverting back to its once highs seems remote now- despite the government’s efforts to do so.

Individual investing

China has approximately 106 million individuals who regularly invest in stocks. The crash has erased about $5 trillion in sales from the mainland stocks. The big downside of such an environment is hat companies could find it difficult to raise equity financing required to remove themselves from relying on debt.

China has made the decision to peg the Yuan lower relative to US dollar. This decision has led to two major upheavals in the market. It led to a weaker RMB and if one goes by Goldman Sachs, the Chinese currency will suffer about three percent depreciation during the next 12 months. Many analysts, however, take a different view. They hold the opinion that the RMB may actually strengthen in the following months. If one goes by Bank of America Merrill Lynch, continued weakness in the dollar may strengthen Yuan compared to the US dollar, even as the RMB weakens against other currencies.

Realization and burn

According to Steve Wang of Hong Kong based Reorient Financial Markets Limited, people have reached the realization that it is impossible for the stock market to rise indefinitely after the crash. Direct financing via the equity market and IPO activities have been reduced. This is important as individual investors are much more influential in China as their activities drive 80 percent of total trading in the Shenzhen and Shanghai bourses. In contrast, individual investor activities are only 15 percent in the US.

The Chinese bubble started to inflate from the latter part of 2014 as the policy makers championed equity financing and the state media actively promoted the market. As shares grew in popularity, new trading accounts were opened at a blistering pace by investors. Huge margin debt amounts became common place. The unraveling was quick too. There was a 30 percent dip by Shanghai Composite Index in first month, with the index finally losing about 49 percent. The Chinese Government, in its bid to halt the massacre, permitted companies to stop trading and banned important shareholders from selling. State-owned institutions were ordered to buy.

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