Behind the Collapse

Shanghai Composite Index keeps going down from 4300s to 3400s only in 5 days! Except for the impact from stamp duty mentioned in the last post, many sad news depressed China's stock market recently, such as, the outflow of investment (if you look at OBV, a steep downward sloping line will show up.), the death of Vice Premier Huang Ju, the fear of 18th anniversary of Tiananmen Square protests, and many many noisy rumors.

(above: on June 4, more than 500 stocks' price slumped by 10%, the maximum daily descending amount in China's stock market.)

"Communism knows bad things will happen, but they won't tell ya when they will happen." once I heard in a business forum regarding China's overheating economy. Now, these words can be applied to the shock of today's stock market. Fears aroused at least 2 weeks before the descents, but nobody knew when it would exactly take place, until the central government triggered the stamp tax.

The bubble burst, but how much it will hurt China's economy? In the article, The Great Wall of Money, Economist magazine argues that, China's economy may be less vulnerable than it appears.

Briefly, several reasons are associated with that:

First, the number of shareholders is a small proportion of national population, just round 7%. However, the number is U.S.A is about 50%. So the slump in share price will not spread to the whole country.
(above: I would argue, although few people are doing stock, compared with national population, it is still a big hurt to some families. Especially those old people who put lots of life-time savings into stock market, and get nothing back. )

Second, people's investment on stock market is still relatively small. Equities account for less than 15% of Chinese households' total financial assets, compared with half of those of American households' (including their pension funds). Chinese still save a lot.

Third, the way Chinese businessmen finance their companies is re-investing companies' own profits (about 60%) and making loan from banks (about 20%). However, only 10% is fund by issuing stock. So the collapse of share price is supposed to hurt companies performance as much as we worry about.

Then Economist concludes that, based on above analysis, present 500 points drop, even more in the future, will not be a big attack on China's overall economy.

Well, We all hope it would be a modest impact on China. Let's pray, and we will see.