The Chinese Stock Market Bubble Pop :: Wamhoff Financial & Accounting


The Chinese Stock Market Bubble Pop

Greetings! This is Kyle Jones, Financial Advisor at Wamhoff Financial Planning & Accounting. Recently the financial media has been focused on Greece, but we wanted to shift gears and talk about economic news coming from a different country abroad.

Economic news coming out of China has been dismal as the Chinese stock market bubble has burst in dramatic fashion. The chart shown on the screen demonstrates the differential between Chinese economic fundamentals and Chinese stocks.

As of July 8, 2015, Chinese margin debt balances had dropped for 12 straight days, with the most recent decline of 8.5% in one day setting a new infamous record.

On June 12, 2015 the Shanghai Composite index closed at its 52 weeks high around 5,178 and Chinese stocks have been sliding lower since. In a little more than 3 weeks, stocks listed on mainland China’s most prominent exchange tumbled 30% from the seven year highs. The more speculative ChiNext Index has lost 42% of its value over 21 days.

The selling pressure represents the largest losses thus far in the Chinese stock markets since 1992. The Chinese government has since taken strong actions such as cutting interest rates, relaxing margin requirements, and cracked down heavily on short-selling stocks. The Shanghai Index plunged 5.90% during Wednesday trading alone as the government continues to take additional action to try to stem the selloff.

The stock market collapse in China paired with the debt crisis in Greece is being felt by U.S. investors, particularly with enhanced volatility and a strengthening U.S. Dollar. Since the Shanghai Index began crashing in the middle of June, the U.S. Dollar has gained 3% in value against global currencies as foreign investors seek shelter in U.S. dollar denominated assets.

According to the Wall Street Journal’s Jon Hilsenrath, “for now, Fed officials are cautious about overseas developments but appear unalarmed.” Ultimately it is too early to tell how the U.S. stock market will behave in the longer-term as it relates to the volatility being seen in global financial markets. However, it is likely that in the short-term volatile price action in both directions will persist. Until next time, Happy Investing!

Charts in Podcast Shown below:
graph-1
Chart Courtesy of www.zerohedge.com. “This chart or graph is hypothetical and for illustrative purposes only. It is not intended to show the performance or return of any particular investment. Past performance cannot guarantee comparable future results.”

graph-2
Chart Courtesy of CEIC, Morgan Stanley Research. “This chart or graph is hypothetical and for illustrative purposes only. It is not intended to show the performance or return of any particular investment. Past performance cannot guarantee comparable future results.”

graph-3
Chart Courtesy of www.zerohedge.com “This chart or graph is hypothetical and for illustrative purposes only. It is not intended to show the performance or return of any particular investment. Past performance cannot guarantee comparable future results.”

http://www.marketwatch.com/story/chinas-stock-market-crash-is-just-beginning-2015-07-08
http://www.zerohedge.com/news/2015-07-07/china-futures-plunge-8-over-half-stocks-suspended-margin-debt-crashes-most-record
http://www.wsj.com/articles/fed-casts-wary-eye-on-global-tumult-1436378455