The Great Fall of China

Thousands of amateur Chinese investors have been devastated by a 30% plunge in the Shanghai Composite index.

It sounded like 1929 all over again. Early this month, there were stories on social media about investors hit by the slump in the Chinese stockmarket jumping out of skyscrapers, says Peter Evans in The Sunday Times. The rumours were false, but plausible. Thousands of amateur investors, many of whom had borrowed money to buy stocks, had been devastated by a 30% plunge in the Shanghai Composite index.

What rattled many of them, as well as foreign observers, was that the government seemed to have lost control, as Fidelity's Tom Stevenson noted in The Sunday Telegraph. "Short of a decree that the stockmarket can rise but not fall", it had tried "pretty much everything".

After monetary loosening in the form of interest-rate cuts and trimming banks' minimum cash reserves failed to have an impact, it banned short selling, shelved initial public offerings, bought shares, suspended trading in half the market and even, "ludicrously", forbade the use of "sensitive" words in market reports.

But by the end of last week, the frenzied campaign to prop up stocks was starting to look more successful. Stocks bounced on Thursday and Friday, rising by almost 11%, their biggest two-day gain since the crisis. Meanwhile, suspended stocks began to return to the bourse.

So is the "Great Fall of China" over, asks Randall W. Forsyth in Barron's. Reorient Capital's SteveWang notes that short selling slumped by 75% from its peak. That shows that "despite the patchy, uncoordinated and highly criticised policies being rushed out by Chinese financial regulators, the risk-reward for going against the state is not worth the effort", he says. The authorities also ensured that a record $13bn flowed into Chinese equity funds in the week to last Thursday, says Bank of America Merrill Lynch.

Whether the stock slide ends this week or continues, the government has lost credibility. It had supposedly embraced pro-market reforms, but when push came to shove, resorted to increasingly statist measures to bolster stocks. Still, this doesn't change the big picture, as MoneyWeek contributor Rupert Foster points out.

As he explained in our cover story last month, the gradual increase in consumption as a share of GDP should make China a solid long-term investment. And thanks to the overdue market correction, investors can now gain access far more cheaply than they could in June.

Recommended

Short squeeze
Glossary

Short squeeze

When a large number of short sellers target the same stock, the price can rise in a self-perpetuating circle known as a 'short squeeze'.
6 Dec 2021
Has the “jam tomorrow” bubble popped already?
Stockmarkets

Has the “jam tomorrow” bubble popped already?

Fund managers have had a good year so far. John Stepek looks at what to expect from markets until year end.
6 Dec 2021
Ewan Markson-Brown: the joy of small companies
Investment strategy

Ewan Markson-Brown: the joy of small companies

Merryn talks to Ewan Markson-Brown of Crux Asset Management about why when it comes to emerging markets, he much prefers to invest in micro- and small…
3 Dec 2021
Forget socialism – shareholder capitalism is delivering
Economy

Forget socialism – shareholder capitalism is delivering

Many Millennials say they would prefer to live in a socialist society. That's understandable. But while socialism promises everyone ownership and powe…
3 Dec 2021

Most Popular

Three safe bets on the growing online gambling sector
Share tips

Three safe bets on the growing online gambling sector

Professional investor Aaron Fischer, creator of the Fischer Sports Betting and iGaming ETF, picks three of his favourite online gambling stocks.
29 Nov 2021
Making sense of the new minimum pension age rules
Pensions

Making sense of the new minimum pension age rules

The rules surrounding the minimum age at which you can start tapping into your retirement savings have been tweaked, but are still confusing. David Pr…
23 Nov 2021
Bubbles grow in global property markets as house prices continue to rise
Property

Bubbles grow in global property markets as house prices continue to rise

House prices grew by 6% in the year to mid-2021 in 25 global cities, with the German property market in particular showing signs of overheating.
3 Dec 2021