Is Australia Ready For The Great Chinese Stock Market Crash?

Chinese stock markets are in freefall. Just when you think it can’t get any worse, the markets spring another surprise.

The dramatic fall we’ve witnessed since the start of June shows no sign of abating. Chinese stocks have shed up to 30% of their value in a matter of weeks. Over $3 trillion worth of shares have been wiped, roughly double the size of Australia’s entire economy.

It’s high time we started calling this debacle for what it is. It’s not a correction anymore — it’s an old fashioned stock market crash. The Chinese authorities are trying everything in their power to stem the tide. But every measure they take adds to suspicions that the situation has spiralled beyond their control.

This should concern every single Australian. It doesn’t matter whether you’re an investor or not. This is a matter of grave urgency that could unleash a global wave of wealth destruction. Everyone will feel the effects of a Chinese market collapse.

Unlike Greece, our economic kinship with China is dependent on the Middle Kingdom’s stability. Like it or not, their problems are our problems too. Anything that threatens their economic wellbeing is potentially detrimental to our economy.

Simply put, China is our biggest trading partner, on which our export industry is heavily dependent.

Right now, there are far too many black clouds circling above the Chinese economy.

Local government debt is estimated at over $5 trillion.

The housing market is teetering on the edge, struggling with an oversupply of dwelling and slowing rural migration. That largely explains why the government campaigned to promote stocks to investors. They were worried that the housing market was overheating.

All they did was trade one asset bubble for another. Now share markets are plunging faster than anyone could imagine.

A major shock in any one of these could spill over into the other two. The effects of all three unleashing a force onto global markets are hard to measure. But the impact could be devastating. Certainly, Australia’s exposure to China would put paid to any hopes for a domestic recovery.

Granted, the Chinese aren’t stupid. They realise the magnitude of a broader asset crash to global economies.

Again, it’s not so much the stock market itself that’s the problem. Aussie investors are secure from direct losses, as they can’t trade on Chinese markets.

But a full blown stock market crash would put millions of Chinese retail investors in strife. And that has the potential to cause serious harm to China’s broader economy. It could wipe out an incredible amount of wealth, which would inevitably hit the property market too. Inevitably, it would drag on consumer spending at the time when China needs it most.

That would hamper China’s ability to hit 7% GDP growth rate targets. Anything which affects Chinese growth will hit us hard too.

Aussie exports will tumble, government tax revenues will decline, and debt will pile up.

Markets fall further despite government measures to prevent slide

Authorities are now scrambling to try and put a stop to the massive selloffs on the markets.

The Shanghai Composite Index has had a mixed few days. On Monday it recovered almost 7% of its losses from last week. It couldn’t sustain that however, with those gains wiped out by the close of trade.

This morning, the SCI continued to tumble, falling by 2.4%. The Shenzhen Composite, an index of tech stocks, slid by 3.4% as well.

The inability to arrest this slide led to the suspension of trade across 700 stocks today. That means that a staggering one quarter of the market ceased trade.

What we’re seeing is that margin traders continue to unload their bets on the market. And that’s taking place despite concerted government measures to boost the market.

Regulators and government authorities have tried just about everything in their arsenal.

Last month, the PBoC cut interest rates to 4.85%. In addition, capital requirements were slashed too for some lenders. These moves were an attempt to simultaneously lift both the economy and stock markets.

Then last week the decision to accept homes as collateral for stock purchases was announced. The absurdity of this almost needs no explanation. It has the potential to peg the housing market to the future performance of stocks. Unloading the problems of one troubled asset onto another is irresponsible, to put it mildly.

At the same time, they also decided to suspend new initial public offerings, while setting up a market stabilisation fund.

If that wasn’t enough, the authorities’ next measure was telling.

The Securities Association of China announced that $26 billion was to be invested in blue chip stocks by the nation’s largest brokerages.

Yet despite all these desperate measures, margin traders continue to sell. The ineffectiveness of their strategies is a major concern. The situation isn’t even levelling off — it’s only getting worse.

A long way to go before the market bottoms out

Despite Chinese stock markets crashing by 30%, there is plenty of scope for further falls. It’s worth noting that the Shanghai Composite index will still show returns of 85% for the year. It may be crashing quickly, but it’s rise was even more striking.

That’s the only reason why global markets aren’t in complete meltdown.

Chinese investors pushed up stocks way beyond their true value. We know this because the growth in stock prices isn’t reflected in rising company profits.

But with so many Chinese investing their wealth in stocks, the downturn is significant. We shouldn’t have to wait until all the gains are wiped out before pressing for the panic button.

And there’s no telling how far the market will go before it normalises.

For the foreseeable future, things are likely to get worse before they improve.

Mat Spasic,

Contributor, Markets and Money

PS: China’s stock market cold is developing into a full blown flu. The fallout from their market crashing will have big repercussions for the Aussie markets. It’s hard to remain bullish on the future of the local share market when the economic prospects look so poor.

Markets and Money’s Vern Gowdie sees a major correction across the ASX in the future. Vern is the award-winning Founder of the Gowdie Family Wealth advisory service. He’s been ranked as one of Australia’s Top 50 financial planners. He believes we’re set for a catastrophic crash in stocks in the future. And he thinks the ASX could lose as much as 90% of its $1.8 trillion market cap.

Vern wants to help you avoid the coming wealth destruction. That’s why He’s written ‘Five Fatal Stocks You Must Sell Now’. In this free report, he’ll show you which five blue chip Aussie companies could destroy your portfolio — and you almost certainly own one of them. To find out how to download the report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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