Tianjin is not the only thing in China to experience an explosive catastrophe; China’s stock markets are heading for a major crash, currently swinging wildly out of control.
This emerging superpower is about to lose its super powers as it could face an economic crisis as bad as the Great Depression of 1929.
This crisis, however, is not likely to have a direct affect on anyone living outside of China as so far, these foreign markets have only attracted 1.5% of investment outside of the country.
Government intervention is being used by China in order to stem the panic but commentators have seen this a long time coming.
China’s financial markets have been rising at a ridiculous rate, reminiscent of the times of the dot com bubble for instance and that’s exactly what China’s market can be described as immediately prior to when the swings started, a bubble as prices rose way above the intrinsic value, which is what happens when a bullish market i.e. a market that is rapidly rising, attracts a whole bunch of new investors – 4 million new accounts were opened in April.
What is also common is that leverage is used and in the case of the Chinese markets, far too generous margins (borrowed money from brokers) were used, creating greater risks for new and inexperienced investors and traders.
These new investors believe that they are getting in on a good thing but due to their inexperience they have not anticipated that prices cannot raise that much more. This eventually sends prices plunging and eager faced investors end up ‘losing their shirt’ and most probably their pride as their hard earned capital goes plummeting to great depths.
At present however, the market value is still up by 20% this year as compared to last year but who knows if this will maintain and to place some perspective on the matter, it was up 150% before this – that’s a decline of 130%. A further 35% decline is predicted.
Chinese authorities have attempted to deflect blame by stating that stockbrokers may have manipulated stock prices and the Police Ministry is opening an investigation.
While international investment is slight the international influence of a China crash could be profound particularly if you think of the trade links that China has with other parts of the world such as the US. A ripple effect on the economy and world trade could be the impact felt from the Chinese bubble that was allowed to get too big.
By Sophia Akram