Wednesday, July 08, 2015

Chinese Market Meltdown Bigger Story Than Greece, With Widespread Implications

I've been writing about China's bubble economy since 2010. Now reality is finally setting in.

China's economic growth over the past three decades has been nothing short of stunning, but that trajectory has become increasingly dubious. Many among us have been waiting for China's bubble to burst.

That time may now be at hand.

Despite massive government interventions, China's stock market is in free fall.

In just three weeks, stocks listed on the Shanghai Composite index, mainland China’s most prominent exchange, have tumbled 30% from their seven-year highs. A whopping $3 trillion has evaporated from the Chinese stock market in the last month.

Yet, the plunge isn't over by any means. There's still a long way still to go.

Novice Chinese investors have opened 30 million new trading accounts this year — many on margin. Now they are facing margin calls on their highly leveraged positions, which has ignited a selling frenzy.

Newbie investors are by definition inexperienced, and they are prone to following momentum and the herd. Quite predictably, panic has set in.

Shanghai shares had risen 150% over the previous 12 months, meaning Beijing should have seen this correction coming. The government is attempting to hold back the tide, but it is discovering that it is not so mighty after all.

So far, the free fall has largely affected only Chinese investors; foreigners own just 1.5% of Chinese shares.

However, Chinese stocks represent more than 20% of some emerging-market ETFs, so the pain will be felt far and wide, well beyond China.

China's stock market collapse may lead to a long overdue real estate collapse (which has also started. but still has a long way to go), the opposite of what happened to the US in 2008.

This is a much bigger story than the Greek debt crisis. The Greek economy is miniscule. China's is the world's second largest.

A stock market meltdown could become a full blown real estate meltdown. Stunningly, Chinese regulators are now allowing people to use their homes as collateral to buy stocks! Seriously.

A real estate meltdown would become a full blown economic crisis.

The ripples from a Chinese economic crisis would be felt around the world.

This is a story to watch closely in the coming days and weeks.

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