The great Chinese fall!

SS Kumar By SS Kumar, 9th Jul 2015 | Follow this author | RSS Feed | Short URL http://nut.bz/1_oxav5g/
Posted in Wikinut>News>World

The Chinese bourses are falling for the last three weeks, wiping away $ 3.2. Tn., which is almost 11 times the total Greek debts. This has impacted and will impact the world economy, far greater than the US meltdown of 2008, triggered by Lehman Bros. collapse. The author explains his view point.

The Dragon has caught cold!

The world’s second largest economy has caught cold and the world is sneezing. The stock values have eroded by 30% from its peak values just 3 weeks ago, wiping off $3.5 trillions, twice as India’s GDP. Further bloodbath on the bourses was stemmed, though momentarily, by halting the trade on 1331 companies, freezing shares worth an additional $ 2.6 Tn.

The sagging Chinese economy was not difficult to gauge over the past few quarters, with exports taking a hit and an enormous oversupply of real estates, the latter accounting for nearly 12% of the Chinese GDP. The fall in real estate prices continues unabated from last year and has peaked now, with 1 in 5 homes empty with $ 700 billion of mortgages. In the beginning of 2015 over 50 million homes stand vacant in China. The slump has affected many other industries, about 40 of them, like the steel, cement, furniture, paints, excavating and laying machinery etc.

Coming out of a controlled economy, the Chinese were getting used to luxury living, with the Chinese government vigorously encouraging domestic consumption to prop up the ailing economy, hit badly by fall in exports. A sea change in the mindset was observed, when the Chinese went into the bourses with borrowed sums from banks to gamble with stocks, which saw a rise of 150% in 2014 alone. They never thought that the bubble would have to burst one day and cannot be growing forever, and it began three weeks ago, when the Chinese government too observed the unqualified rise in the value of stocks and on 12th June, banned the trading with borrowed margins.

The fall started that day and has been going down unabated ever since, impacting the bourses all over the world. There cannot be a doubt that many banks would go under, just as it happened in Japan several years ago and in the US in 2008.

The only silver lining is the relatively low share of the role of stocks in the GDP of China, which the country may be able to pull out, given its deep pockets with reserves. But the happy days of fast growth may be finished for now, as the country would have to tighten its belt in the wake of its low performing export sector.

With fall in prices of crude, which is likely to happen between now and October, bullion may also trade weak. I for one would opt to exit the Indian bourse too, to rely on the yellow metal.

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Comments

author avatar Sivaramakrishnan A
9th Jul 2015 (#)

Thanks for the highlight Kumar. It is said stocks can rise higher than we ever imagine possible, and also similarly sink lower.

In 1929, President Kennedy's father sold all his holdings before the big crash when his shoeshine boy started giving him tips, telling him how easy it was to make money on the stock market!

Borrowing and investing is a sure way to doom and gloom. I for one can say with conviction that markets everywhere are manipulated. A man of limited means asked me - how can he make money on the stock market, I told him it is much easier to lose your shirt!

I always wonder how China will ever get back their reserves of USD four trillion, an inconvenient truth! siva

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author avatar SS Kumar
9th Jul 2015 (#)

Thanks Siva, for your adding value to my article. The contagion effect will reach by the fall of this year. Sad, but that is the truth!

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author avatar GV Rama Rao
9th Jul 2015 (#)

A good review of the markets and a peep into the future.

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author avatar SS Kumar
9th Jul 2015 (#)

Thanks GV Rama Rao for your appreciation. I wish that I am proved wrong and the trillions of the investing public are saved! Regards

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