China’s worst stock market dive since 2008 continued on Wednesday, with the benchmark Shanghai Composite index (SSE) — the value of which has slumped by more than 30 percent since mid-June — still heading south despite emergency measures enacted by Chinese regulators. Yet as talk swirled that a crash could shake confidence in Beijing’s capitalist transformation and send tremors across the global economy, analysts suggested there was little cause for panic just yet.
The free fall has evaporated over $3 trillion in Chinese equity, but many economists frame the losses as more of a "correction." The SSE is still standing at 70 percent of their all-time highs of early June — a topping out that followed a 150 percent price gain over the preceding year. That boom was fueled in part by widespread margin lending practices, whereby investors borrowed heavily to buy stock, so some economists argue it was inevitable that the equity bubble would eventually burst.
Market watchers also noted that, unlike in the United States, even dramatic fluctuations in China’s stock exchanges — still a minor component of its slowly liberalizing financial market — bear little reflection of the country’s overall economic health. In China, much more wealth is held in the real estate market, which analysts have monitored closely for signs of a bubble as the country’s once explosive economic growth tapers off.
“Even if the stock market went to zero, which it won’t, China’s economy would still survive. Households would be able to get through this, companies would get through it, even though confidence in markets would take a big hit,” said Scott Kennedy, director of the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies. Most Chinese companies’ investments come through retained earnings, bank loans and bond issuance, rather than the stock market, he said. "It is still a small part of the financial system in China.”
In other words, “it's a crash in how rapid it occurred and in the magnitude of the fall, but this is really a financial sector, stock market phenomenon,” Kennedy added. “China isn’t Greece or Argentina. It still has solid fundamentals.”
Still, the dramatic plunge has prompted drastic action from Beijing, which many have read as panic. In its latest measures Wednesday, China injected even more money from its central bank into the market and banned company shareholders with major stakes from selling shares — both measures intended to stabilize stock prices. Earlier this week, it cut benchmark interest rates and halted trading in more than half of all stocks listed on its two exchanges, as the country's securities regulator warned that "panic sentiment" had set in.
China has a strong impulse “not only to protect investors, but to shield the party from criticism and head off possible unrest,” wrote Andrew Browne in the Wall Street Journal. The priority for President Xi Jinping, who also heads the Chinese Communist Party, is "stability maintenance," Browne said, "which is another way of saying ‘maintaining party rule.’”
"China's leadership has doubled down on its efforts to prop up equity prices because it believes that its own credibility is now coupled to continued gains on the markets," added Mark Williams, the chief Asia economist at Capital Economics, in a new report. "It is following a risky path. Our view remains that a market rally cannot run ahead of economic fundamentals indefinitely," he said. "There is a good chance that the market rescue efforts are seen to be a failure in a few months' time."
Others were more sanguine, noting that other governments have made similarly aggressive interventions in markets facing such crises. And China, which is seen as one of the most liquid countries in the world, has also hardly exhausted its capacity to prop up the market. It has billions of dollars in foreign currency reserves, a state-owned bank that can lend freely, and — with a greater degree of central control befitting a nominally communist country — relatively free reign to engineer the market in a way that would be impossible for a Western democracy, market watchers have noted.
Few, however, were ready to predict that the crash was slowing down and investors from New York to Tokyo were bracing from some turbulence that could result from wavering confidence in the world’s second-largest economy. Any tremors in foreign stock exchanges are unlikely to be dramatic, given the limited stake foreign entities are allowed to have in China’s relatively closed-off securities market. But for American investors, some exposure could come via U.S. stock exchanges, or through companies that do business with China, said Kennedy.
In the U.S., banks, technology and raw materials stocks all dipped on Wednesday, a trend some analysts linked to speculation that amid weeks of anxiety over Greece’s default, the real trouble could be brewing in China.
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