Will The Chinese Economy Crash Harder Than Greece?

Posted on July 10, 2015 in Business and Economy, GlobeScope

By Shinjini Devbarman:

The Chinese stock market has been experiencing a sharp fall after a year of crazy zeniths. The drop made almost 500 companies halt their trading on Wednesday. China’s stock market has created $ 6.5 trillion in value over the last year, a growth that no other market has seen, ever. However, the experts see it as a “stock market bubble”, which can threaten to destabilize the economy. If the concerns of the economists are to be taken in account, the effects of this could be worse than Greek Crisis.

For representational purpose only
For representational purpose only

What is happening?
The two major stock exchanges of China, the Shanghai Composite Index and the Shenzhen Composite Index lost 32% and 40% of its value, respectively since last month. All in all, the Chinese stock market has lost more than $ 3.5 trillion in value. That is a huge amount, enough to pay Greece’s debt 20 times over and cause serious vertigo to the investors and companies.

Meanwhile, the Chinese government is trying everything it can to restore faith in the market. It has cut interest rates to a record low for starters. The China’s Securities Finance Corporation (CSF) announced on Wednesday that it will lend billions to big brokerage firms so they can buy more stocks, hence halting the price drop which had lead to the loss last month.

Even as the Chinese government has been pulling all measures to stabilize the market, the markets remain volatile.

Why is this happening?
Chinese stocks rose to unbelievable heights this year as novice investors started pouring all their savings into the market. The majority of these investors are not even high school graduates. Even farmers started investing their savings in the stock market. The growth in the stock market invited inexperienced investors to the $6.5 trillion market. Today individual investors make about 80% of China’s stock trading. The number of newly opened trading accounts has gone up to 2.8 million, all of them amateur investors.

The Chinese stock market boom does in no way reflect the real economy of the country. In reality, the Chinese economy has been growing at a very slow pace. The economy grew by only 7% in the first quarter which is disappointing considering the fact that Chinese economy had been growing at 10% for years in the 2000s.

The stock market boom was also fueled by debt as people have been buying stocks with borrowed money- a practice which is called ‘margin trading’. As the Chinese government has relaxed its limits on buying stocks from borrowed money, it fueled the market’s rise. People had bought $ 350 billion of stocks with borrowed money by the time the stock market reached its peak in June. If and when the stock market bubble bursts, the country will face a huge debt burden. Chinese market has been experiencing bigger market fluctuations than any other market except Greece.

Essentially the panic is caused by the fact that the boom in the stock market is not a result of a robust economy but because of government stimulus and investor frenzy. So the bubble is likely to crash.

What does this mean for India?
Given the fact that China is largely an independent market from the rest of the world, it doesn’t really matter much to India. Since all economies are essentially tied together, the Chinese stock market crisis will have some impact on the Indian market but if market experts are to be believed, India has the ability to withstand it. India is mainly a domestic demand driven economy so that means that even as global stocks fall, its effects on Indian market will be shallow.

Indian market experienced a drop as the entire Asian market did. The Chinese market drop triggered a 400 point drop in Sensex on Wednesday. Even then experts believe that India has the ability to bounce back.

As IMF announced that India as the fastest growing economy in the world with the growth rate at 7.5%, which is higher than China, experts believe that India is in a relatively better position.