It is no-brainer to touch upon this subject when movements of extra-ordinary nature are happening in world’s second largest economy (in terms of nominal GDP).
The on goings in the Chinese stock market over the last year and a half has transpired both shock and awe!
The Shanghai Stock Exchange Index rose almost 150%, reaching 5,166 in June this year from levels of early 2,100’s last year. From that, the markets snapped and fell to 3,500. On hope of support from the Chinese Government, the index stabilised for a couple of weeks before paring away all gains this calendar year to settle near 3,000 points. The index witnessed a decline of more than 40% from its peak, taking down with it the enormous retail participation which had built up over the year.
The Chinese markets have been swinging wildly since last year
For more on occurrences till July 31, 2015; refer the link below –
Now, let’s go through the set of numbers which highlights the fragility of the Chinese economy and understand what they indicate –
Table 1 –
The Chinese currency – Renminbi had largely stayed upbeat and steadily appreciated in the last 5 years. With slowdown fears looming large over the country, the Chinese central bank devalued their currency by more than 3% to boost the exports. As can be seen in Table 2, it didn’t prove to be of much help.
Table 2 –
With the world now largely inter-dependent, China’s back to back crash of over 8% last week scared the whole world with markets in India and USA cracking over 5% each last week, before covering their losses. The effects could be seen as far as in Germany, Japan and Hong Kong with indices falling anywhere between 2-4%.
Table 3 –
The currencies have taken a beating too. With China’s devaluation of Yuan, the emerging market currencies depreciated by 3-5%. The Euro and Yen though, appreciated by 2.5%.
Table 4 –
Most argue that although August has turned out to be a terrible month for the Chinese markets, washing away gains of the entire year, the Shanghai Composite has worked wonders looking at a 1 to 2 year perspective. Sure, why care about the small investors/ speculators who entered at the peak.
Table 5 –
“Debt financing is equivalent to hanging a noose around your neck”
Well anyone who makes money on leverage is a champ. But, not so much when it comes to hunt you down. Margin financing (the facility of investing in stocks with borrowed money) had gained popularity in the Chinese markets when the Govt. lifted limits last year. The margins jumped to more than 2.2 Trillion Yuan ($350 Bn), almost 10% to float in June. People, with least knowledge of capital markets, jumped in with borrowed funds.
When the dust settled – the carnage had already taken place.
Table 6 and 7 –
A lot of questions have been raised about the growth numbers released by China. While China wants the world to believe it is growing, the elementary figures show otherwise. The claims can be easily set aside by looking at the stagnant production of electricity and dwindling automobile sales.
Table 8 –
Real estate, the beloved investment avenue of well-to-do and the poor alike, has been clearly moving downwards. With monumental capacities built over the last decade, the country harbours a huge real estate stock pile. With few buyers at current prices, the values need to come down to match the common man’s pocket.
Table 9 –
China accounts for almost 40-50% consumption of commodities like iron ore, copper, zinc, and aluminium. With demand falling sharply in last 1 year, the supply glut of the essential metals has seen their prices go down by almost the same percentage since last year.
India Angle –
While, I don’t possess the understanding to suggest a way out, it does seem obvious that the Indian markets are factoring in the macro elements. With uncertainty over US Fed interest rate hike, Chinese slowdown in the East, and stagnant global commodity demand accompanied with falling prices, some stocks are stooping down to very low levels, where they appear as a value buy.
Stay on the lookout, and stay liquid, for the next opportunity may just come to pass!
Table Credits – Business Standard