Does this have anything to do with the New York Stock Exchange shutting down today?
Forget Greece. No, really. As you might have heard by now, China’s stock market is hemorrhaging without a sufficient tourniquet to stem the massive loss—now $3.25 trillion and counting. To bring it into perspective, that figure is more than double the annual GDP of Canada—and there doesn’t seem to be a way to stop it.
In fact, since June 12, the Shanghai Composite Index has lost a whopping 32%. And the Shenzhen—China’s largely tech index, often compared to the U.S. Nasdaq—is down 41%. By every indication, things will only get worse.
Why this matters to any of us can be summarized in a contextual comparison. What’s taking place in China now bears an uncanny similarity to what occurred there before the global financial disaster in 2008-2009—but on an unnervingly larger scale.
If you’re looking for good news, you won’t find it here.
Most analysts agree that China is experiencing a bubble—specifically, one of the largest bubbles in the history of markets. In an attempt to to bolster its flailing economy in the wake of the 2008 crisis, China flooded its stock market with $20 trillion—thinking a steady bull market would result. Instead, the sudden influx of funds exploded, inadvertently creating the massive bubble. The Wall Street Journal explained the rather startling indicators:
“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.”
High-risk margin investments—trades made with money borrowed specifically for that purpose—tripled in number in just over a year. At its zenith, margin debt accounted for almost 9% of the market total—more than any other time in history. Margin financing has since dropped 30% from its peak. A burgeoning contingent of new and inexperienced retail investors contributed roughly 80% of margin investment totals. Recent wild fluctuations in the Chinese market are largely indicative of reactionary over-trading by these inexperienced investors, who are most likely to panic when the market goes south.
Though China has the second largest global market, its value is less than half of the U.S. total. But recently, China’s market volume—total shares traded in a day—has literally exceeded the volume of the rest of the world’s markets, combined.
The Chinese stock market isn’t the only alarming indicator of a possible crisis. Both futures and commodities prices have fallen sharply as speculative demand decreases while supply threatens to glut the marketplace. Various metals, including silver and gold, have plunged in price. Copper, in particular, hit lows last seen in July 2009. Lower metals prices caused a ripple effect, forcing shares in mine companies into a tailspin. Though that might seem insignificant in passing, the resource-laden economy of Australia suffered the full impact and may face a recession. A more ominous prospect for commodities markets is the likelihood metals were used as collateral by many who sought to invest in China’s now tanking stock market.
Futures aren’t faring any better, either. Plummeting oil futures brought U.S. crude prices down 8% for the week with market indicators pointing to a downward trend. Pre-opening futures in the three major U.S. exchanges hovered near a 1% loss.
China’s government has implemented an extensive list of stops in an attempt to stabilize the market, but this has been a futile endeavor so far. Rate cuts from the Chinese central bank, a cut in initial public stock offerings, and pledges from China’s twenty top brokerage firms to buy stocks have been inconsequential at best.
Petrified Chinese companies yanked their shares from the market altogether—at least 1,430 of the 2,776 total companies traded in China have halted trading. This means around 43% of China’s stock market is effectively frozen.
Another factor necessitates consideration: China’s enormous debt burden. An epic, mounting debt has increased over $20 trillion since 2008 and is now equal to 300% of the country’s GDP.
Wednesday’s opening of the Shanghai Composite saw an alarming 8% drop—though a slight rebound by midday netted a 4% loss. Most stocks had reached the maximum permitted 10% loss by the middle of the day.
Though Greece’s impact on the U.S. totals $12 billion, RBS Economics noted that China’s impact amounts to a breathtaking $100 billion. Unfortunately, China’s options are evaporating as quickly as its finances. If the market starts to bottom out, “it will make the drama surrounding Greece look like a sideshow,” an article in the Wall Street Journal warned. “China has been the largest contributor to global growth this decade; Greece’s economy is about the size as that of Bangladesh or Vietnam.”
— RBS Economics (@RBS_Economics) July 3, 2015
Wednesday morning on the New York Stock Exchange started with falling prices that took a sharp downturn before trading halted due to an apparent “technical glitch.” But with the Dow Jones Industrial average already off by 177 points when trading abruptly ended at 11:32am, “technical issues” might be the least of our concerns. Even after trading stopped, the Dow loss briefly exceeded 200 points but had corrected to a 163 point loss by 1:00 pm. Of the eleven other stock exchanges that did not experience technical issues, trading purportedly continued smoothly and without issue but maintained a downward trend. By the close of business for Asian markets on Wednesday, Hong Kong’s Hang Seng Index plummeted to a 5.6% loss after briefly reaching 8%, Japan’s Nikkei Index experienced a 3.1% loss, and China’s Shanghai Composite was pummeled with a 5.9% overall loss on the day. At the time of publication, the NYSE was slotted to reopen between 2:45-3:00pm.
It appears we may feel the repercussions of China’s crisis sooner than previously imagined.
(Featured Image Credit: Rafael Matsunaga)