For the third week China’s stock market continues to plunge. This year China’s stock market showed signs of a bubble. Stocks prices rallied as the economy was slowing becoming overvalued and detached from China’s economy. The Chinese economy in the first quarter of 2015 saw the the lowest growth since 2009.
“There are four basic signs of a bubble: prices disconnected from underlying economic fundamentals, high levels of debt for stock purchases, overtrading by retail investors, and exorbitant valuations. The Chinese stock market is at the extreme end on all four metrics, which is rare.” WSJ
Chart from WSJ.
Over the last few years China relaxed regulation limits on buying stocks with borrowed money (margin trading). The China Stock Market slump began in Jan. after a crackdown on margin trading.
China’s government is pulling out all the stops to support share prices: cut interest rates to a record low, brokerages buying billions worth of stocks, suspension of new share listings. In June with growing concerns of the plunging stock market China Securities Regulatory Commission (CSRC) amended previously strict rules on margin trading. China’s Stock Market reached it peak in June with a record $358 billion pile of margin debt (borrowed money).
The price of commodities like iron ore and copper have been affected.
For Australia, the market crash in China is likely to impact earnings on key exports iron ore and coal, further slashing government revenue, while also putting downward pressure on the Australian dollar.
Jordan Eliseo, chief economist with ABC Bullion, said it was important to remember that the amount of wealth Chinese citizens have tied up in the stock market is relatively minor compared with western investors.
Stocks only make up about 8 per cent of household wealth in China, compared with around 20 per cent in developed nations.
“The market crash there is generating headlines, but it’s not going to have the same impact as a comparable crash would in a developed market,” he said.
“What it means for Australia, though, is it’s very clear there are some serious imbalances in the Chinese economy, and the rate of growth they’ve enjoyed in the past is over. There’s no question our export earnings are going to take another hit.”
Mr Eliseo predicts Australia is likely to experience “recession-like” conditions such as negative wage growth for many years to come. “I believe that’s going to be the new norm,” he said. NewsAU