In case you missed it, China’s stock market took a massive dive yesterday:
Although this would not be the first dive that it’s taken in the last month (if anything, it looks a bit tame by comparison):
And this wouldn’t be the first time that I’ve written about it either. If you missed, the post from three weeks ago was called “MEANWHILE, IN CHINA“.
Reasons that the Chinese Stock Market Crash is so interesting
- Well obviously, the Chinese government decided to intervene to stop the crash. Multiple interventions. Which is this weird socialist-communist-capitalist twist.
- But more importantly, the Chinese stock market also has a far larger proportion of individual retail investors than most. According to Reuters, 85% of Chinese stock trades come from individual investors. Compared to, like, ±30% on US stock markets (from this dodgy reference – but it’s a reference regardless).
- And that number of retail investors has grown. Rapidly.
- But those investors…have some awkward education levels. Here:
- I mean – not to sound snooty – but two thirds of those new investor households didn’t finish high school.
- And worse, those awkwardly-educated retail investors are trading with borrowed money:
- Here’s an estimate from the Bank of America of the size of formal borrowing/margin/leverage:
- And what you need to remember is: that 3.7 trillion yuan margin subtotal is not “investment”. That margin is just a deposit on the investment. If you assume that retail investors are depositing 50% of the value of their investment in margin (based on those “common leverage” figures in the table), that means that implies that 7.5 trillion yuan of the market cap is being funded by margin-financing.
- That accounts for 34% of the value of tradeable shares.
- And that’s not including all the available leverage channels.
So there is this toxic combination of first-time, fairly-uneducated, individual retail investors who are trading the bulk of market on borrowed money.
And if you want to see that unfolding, look no further than the trading volumes.
If you look below, it looks like there were no trading volumes prior to June. Almost as though there is a glitch in the system.
But there is no glitch. There is just no scale. If you cast your eyes at the trading volume on 29 May 2015 (above), on the far right of the top line, you’ll see trading volumes of some 61 billion.
That volume is up to about 6 quadrillion.
That – that is what you call a market panic.
Curiously, it’s not all bad news. As I said in that earlier post, economists have mixed feelings about what the market crash will mean for the Chinese economy. Their main points:
- The rapid increase in stock prices has coincided with a period of really weak growth.
- It seems that people are delaying their normal spending in order to pour money into the stock market.
- Only now that they’ve realised that too much stock investment can be bad for one’s health, they might resume normal consumption patterns.
- And as for the lost money, the Chinese government has committed to financing it.
- Perhaps will all that trade surplus that they have floating around?
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.