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".

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement

Recommended

Visit/investments/stockmarkets/600688/bullish-investors-return-to-emerging-markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Visit/519872/beware-the-hidden-risks-when-investing-in-emerging-markets
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019
Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/517688/the-british-equity-market-is-shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019

Most Popular

Visit/investments/property/601081/three-things-matter-for-the-uk-housing-market-now-and
Property

Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020
Visit/investments/property/601065/what-does-the-coronavirus-crisis-mean-for-uk-house-prices
Property

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020
Visit/investments/stockmarkets/601101/has-the-stockmarket-hit-rock-bottom-yet
Stockmarkets

Has the stockmarket hit rock bottom yet?

The world's stockmarkets continue on their wild and disorientating rollercoaster ride. Investors are still gripped by fear. So, asks John Stepek, have…
2 Apr 2020
Visit/investments/commodities/energy/oil/601107/oil-shoots-higher-have-we-seen-the-bottom-for-the-big-oil
Oil

Oil shoots higher – have we seen the bottom for the big oil companies?

Just a few days ago everyone was worried about negative oil prices. Now, the market has turned upwards. John Stepek explains what’s behind the rise an…
3 Apr 2020