You’ve probably heard on the news about the stock market correction in China. Last year, Chinese stocks experienced huge gains and surged more than 140%. Oh my Buddha, that’s insane! 😯 But since June 2015, the market has dropped by almost a third in value. Some people in the media claim this is some sort of catastrophic event comparing it to the Great Depression.
But we know better. 😉 First of all, a 33% drop, after a 140% gain is not such a bad thing. In fact that’s a net positive return of 60% in about 18 months, so who’s complaining? 🙂 Secondly, due to strict foreign investment regulations only 1.5% of all the stock market shares in China are owned by foreign investors like Canadians and Americans. So this recent market decline has very little direct impact on investors outside of China. And lastly corrections inevitably happen after a parabolic upward trend, so this shouldn’t be a surprise to any informed investor. “Those who cannot remember the past are condemned to repeat it.” ~George Santayana
The Boom and Bust of China’s Stock Market
It all started a couple years ago when the Chinese government wanted to boost the country’s economy. It implemented policies making it easier for retail investors (average folks) to invest in the stock market. Things worked out even better than expected and the market quickly became detached from the fundamentals of the underlying economy. Last month the Shanghai Composite Index (SSE) started to fall. To make things worse many investors were investing on margin and had been forced to sell their stocks as their shares lost value which only perpetuated the downward momentum. 😕 Within a few weeks the SSE had dropped almost 33%. Here’s a comparison of stock markets over the last 12 months. (blue line = China, red line = Canada, yellow line = U.S.)
Recently China’s government put in measures to prevent further market sell-off by capping short selling, and encouraging investors for the first time to use their homes as collateral to borrow money to buy more stocks. Wait. Say what? Chinese investors have lost about $3 trillion (more than 10 times the entire GDP of Greece!) in the stock market since June 12 because the system had been too leveraged. How is giving people access to even more leverage now a good long term solution? If the real estate market also corrects then investors won’t just lose all their stock market investments, but quite possibly their homes as well. 😐
Earlier this year some financial experts warned China’s stock market might be in a bubble. What was their first clue, that the stock market value more than doubled in 2014? lol. The new policies to restore investor’s confidence seem to be working though as the SSE rose 5.8% yesterday, and another 4.5% today ending the week at 3877.80 points. That’s a 10% increase in the stock market over the last 2 days. That’s too much volatility for me. If that happened to North American stocks my net worth could make $50,000 swings every week, lol. No thanks.
There are some indirect effects we’ll probably see from China’s stock market decline. If the country’s demand for commodities fall then Canadian exporters will see a decrease in profitability. This is already starting to happen as the price of oil is down 10% over the last week. Sorry Alberta. 🙁
I’m not predicting the SSE will continue to fall, but I wouldn’t be surprised if it reverted back to between 2,000 and 3,000 points. That means mining and other natural resource stock on the Toronto Stock Exchange could face further challenges. But overall it’s not a big deal as long as we have diversified portfolios. The stock market correction in China has the potential to become a major global financial problem, but for now it’s just gravity taking effect of an overvalued market so it’s all good. I would keep an eye on it but there’s no reason to rush for the exit or make any changes to our long term financial plans. 🙂
Random Useless Fact