The price drop is a price drop. I don't think we can add too much useful commentary to it.
The politics of it, well that is interesting. The Chinese government is acting a little panicky. Suspending trading, banning "malicious" selling, state supported margin loans.
It makes me think that they may have taken on the pundits' belief that the chinese public will support the CPC regime only as long as rapid economic growth is part of the package, that any economic troubles will result in regime change.
Well put. However, you have to question the assumption that a stock market crash affects the economy in a significant way. For example, it would make sense if a lot of savings were lost, because that would affect consumption. However, that's not the case. As the Economist pointed out - "Less than 15% of household financial assets are invested in the stockmarket: which is why soaring shares did little to boost consumption and crashing prices will do little to hurt it." [1]
The fundamentals of the Chinese economy remain strong and the the Communist Party's panic-stricken attitude isn't helping matters much.
Possibly… I don't really understand how that stock market-economy relationship works.
It's also entirely possible that the CPC could survive a full blown high street recession. I don't really know. But this is a game of he thinks she thinks that I think. The CPC seems to be reacting (so far, not that severely) in ways that suggest they are worried. I suspect they are worried about political consequences, not just economic ones.
Nothing has happened yet. I'm just speculating. But, I'll prick my ears if scapegoats start emerging, arrests happen, someone is accused of intentionally sabotaging the chinese economy…
The governments actions seem a little worryingly like they don't know what they are doing. They shouldn't be trying to prop the market up but should worry about maintaining spending in the real economy so people don't lose their jobs and the like.
Agreed, and actually part of that storyline is the fact that there is a massive outflow of capital from China, estimated $1 Trillion cash flowing out of China last year (http://bit.ly/1CP8Oj3), no doubt to due the people's inability to trust the government. China reported having foreign exchange reserve of $3.6 Trillion, which means that it will run down the reserve to 50% in two years, and even faster if panic helps accelerate the outflow. This places serious doubts on the chinese government to contain any massive deflation to either its stock market, real estate, local government debt, or black market lending using its reserve.
It's still a serious problem, but it seems like the $1 trillion outflow number is the authors' projection for the next year, based on their estimate of accelerating Q2 outflows.
Regarding the past year, the article simply says that "the cumulative capital outflow over the past five quarters [is] $520bn."
The CPC just want a soft landing, not necessarily maintaining high growth. Rapid deceleration of this nature is not a soft landing and is extremely disruptive. The whole system can come apart at the seams from wild swings as the Chinese economy is built on layer upon layer of structured fascism, unlike the mostly free market system of western economies which have evolved to mostly absorb these sorts of blows.
Or it's because the CCP was cheerleading stocks during the boom, and there was a VAST increase in the number of trading accounts being opened in the run up to the peak. Pensioners put their life savings into the stock market because the government was cheering for it (and it's not always a bad bet to go with what the government is backing). It dropped, what, 30%?
The rules changed so that housing can be used as collateral for margin lending, so a lot of them could have lost a lot.
P/E was about 100. In some cases, earnings might be fabricated. Get a loan (requires good connections), fake revenue, IPO, use the high stock valuation as collateral for the loan (I think this is allowed in China). Get more loans. Fake more revenue. Embezzle a bit. Usually they mean well, and aren't just outright cons, but there was apparently one big one the Hong Kong Exchange (which is usually more rigorous).
Housing can be 10X income. In some places 20X income. It's partly due to the government forcing down interest rates (tightly regulated banks - so savers may have negative real interest). Banks put a loan as doubtful if the debtor has stopped trading for 6 months, so there could be a lot of debt that's not so solid. And no-one knows what GDP is, but it might not be growing as fast as the government says.
An Asian country, with a median age over 35, crony capitalism, high savings rates, possible asset bubbles, a possible stock bubble, a government that's likely to go for bailouts rather than restructuring, and everyone thought it was going to own the US in a few short years if it doesn't already ... sound familiar? Japan, 1990?
Let me explain - China will bail out banks, state-owned enterprises (typically way less efficient than the private sector in China), and local governments. That ties up capital investment - the main people able to invest will be inefficient / corrupt cronies. Not so great for future growth. They might purge a few officials / bankers, but their replacements will not be much better (and maybe just from the right faction / family).
Just to big up a blog (quite bearish, but the guy's solid - it's not Zero Hedge) - http://www.baldingsworld.com/ is pretty good. He's typically said that the stock crash isn't that relevant - there's deeper economic problems, and while a stock crash might be a catalyst it's not the major worry (since the entire market cap isn't that big). It is a political worry though - the government lost a lot of face when they cheer-led stocks, then bailed them out, and they're still not doing as well as many people hoped.
I joke that at least the government is focusing on stability and fundamentals though - they started rounding up human rights lawyers.
I think you have not looked at all the signs. Why are all the Chinese exiting the market and trying to get out of the country? This runs deeper then just their stock market.
The politics of it, well that is interesting. The Chinese government is acting a little panicky. Suspending trading, banning "malicious" selling, state supported margin loans.
It makes me think that they may have taken on the pundits' belief that the chinese public will support the CPC regime only as long as rapid economic growth is part of the package, that any economic troubles will result in regime change.
IMO, that's the storyline to watch.