No wonder, Greece’s exit from the Eurozone (Grexit) dominated the news headlines all over the world, but recently according to sources the volatility in Chinese markets is regarded as a bigger concern than Grexit; The simple reason for this being the huge size of China’s economy. Within the last three weeks, China’s stock markets have shed over $3 trillion in terms of market value. This is more than 10x Greece’s GDP of $237 billion in 2014.
Below is a comprehensive 10-point list describing the whole story:
1. Days after the government unleashed the measures to arrest the slide in equities which jeopardize to destabilize china’s economy; the Chinese stocks were actually back to their losing ways on Tuesday. Since June 16, the Shanghai Composite (China’s main index) crashed about 28% from 5,166 to 3,728 in just a short span of 3 weeks. Further, the Chinese markets have now shed to almost 1.5 times India’s Gross Domestic Product in the last three weeks.
2. The Chinese markets crash saw the benchmark index soar 150% from July 2014 to mid-June 2015. In these 12 months, the stock markets of China rose notably to create $6.5 trillion, according to Bloomberg data. The rally in China’s markets is regarded as the world’s largest stock market bubble, by David Woo of Bank of America
3. The relentless rally drove the Chinese market valuations to untenable levels. The price-earnings ratio of the Shanghai composite index increased to almost 26 by June 2015 as compared to 10 that was a year ago, according to New York Times.
4. in order to kick-start the economy, China’s central bank cut interest rates thrice. Thus the rally in was triggered by easy money. Waning of rules related to margin trading led to a debt-fueled rally in Chinese stock markets.
5. 85% of trading in China is done by retail investors. To gain advantage of the rally, the investors, such as barbers, university students and janitors resorted to margin trading. When the markets started falling, margin calls were triggered, thereby forcing many retail investors to liquidate their shares, in order to raise cash, and depressing markets.
6. The market havoc forced many Chinese companies to ask get their shares suspended from trading. Almost a quarter of nearly 2,800 companies listed in Shanghai & Shenzhen filed for a trading halt. After this almost 200 more companies announced a suspension.
7. On Saturday, the Chinese government suspended the issue of new share and asked brokerages to purchase a minimum 120 billion yuan of stocks.
8. According to The Economist, the Chinese market crash could prove as damaging for the development of the country.
9. The tumble in Chinese markets has also affected the commodities markets, with prices for natural gas, copper, iron ore and coal falling to 2015 lows. This is certainly a bad news for those economies that rely on export of commodities.
10. The recent fall in Chinese markets is termed as ‘much needed consolidation’ by Nomura. Wendy Liu, analyst with Nomura wrote that the period between now and the interim result in August is the point where Chinese equities may subsequently rise higher.