A stock market crash in China has gone mostly unheralded, perhaps due to the attention focused on debt-ridden Greece and its June 5 public referendum that rejected further austerity measures required by the EU to bolster its struggling economy. In China, the crash wiped out $3.2 trillion from Chinese shares in only three weeks. In response, China’s government is promising emergency measures as fears of monstrous public disorder are piqued. IG Markets, Australia’s principal foreign exchange provider, provided analysis of the meltdown: “State-owned newspapers have used their strongest language yet, telling people ‘not to lose their minds’ and ‘not to bury themselves in horror and anxiety’. [Our] positive measures will take time to produce results.” IG Markets predicts that prices for Australia’s commodities will decline. “If China does not find support today, the disorder could be monstrous.”
The shares of China’s state-operated companies such as Asia’s biggest petroleum producer PetroChina Ltd., as well as four major state-owned commercial banks, fell by close to 10 per cent. Trading of almost 900 other companies fell by the maximum 10 per cent daily limit permitted by regulators, according to Hexun.com.
On July 4, the biggest brokerage firms in China said they would pump in excess of $25.35 billion into the country’s stock markets to curb the decline. They will spend at least $25.75 billion on blue chip exchange traded funds, according to the Securities Association of China. The Shanghai Composite Index closed down 5.77 per cent to end at 3,686.92 points on July 3. Since peaking on June 12, the SCI has dropped nearly 29 per cent, which Bloomberg News said was its biggest three-week fall since November 1992.
The People’s Bank of China has begun lending money to investors to buy shares, while The Wall Street Journal says this “liquidity assistance” will be provided to the regulator-owned China Securities Finance Corp, which will lend the money to brokerages, which will in turn lend to investors. This is the first time that China’s central bank has pumped money to any entity other than banks. China is halting any new stock listings, and on July 3 Chinese authorities announced that it would limit initial public offerings in an effort to arrest falling share prices. The amount of the help from the central bank was not revealed in the Wall Street Journal, but no ceiling has been announced.
On July 6, share prices for large state-run companies spiked when the news of government intervention came across the bow, but prices for other shares plunged as small investors sought to cut their losses. The Shanghai Composite closed up 2.4 percent but still was down 27 percent from its June 12 peak. Observers cite fears that a full-blown stock crash may be in the offing, therefore jeapordizing the fortunes of other markets just as the Europe is facing the potential exit of the eurozone by Greece.
Perhaps softening the blow, Australian economist Jordan Eliseo told ABC News of Australia that China’s citizens have little wealth tied in the stock market. Eliseo said stocks only make up about 8 per cent of household wealth in China, compared with around 20 per cent in developed nations. However, he did say that the explosive growth experienced heretofore by China’s economy is over. Also, Australia – a significant producer of commodities such as wheat and cotton – may experience recession-like conditions and negative wage growth for many years into the future.
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