China’s stock markets are in turmoil right now, with the benchmark Shanghai Composite collapsing 29% in just the last 3 weeks.
The collapse closely mirrors the Wall Street Crash in the US in 1929 and the Chinese government has been desperately scrambling to try and stop the fall. The People’s Bank of China has cut interest rates, relaxed rules, banned short selling and is now getting brokerages to buy up stocks to prop up prices.
Despite the latest measures, which Chinese state media is saying will solve things, Citi thinks China’s indices have further to fall.
In a note sent to clients Monday, Citi analyst Jason Sun and his team say Chinese stocks “still [have a] long way to go.”
Citi say: “Despite the sentiment help, we believe continued deleverage, and possible reform concerns given recent administrative intervention, will cap index upside. We estimate one-fourth margin buys forced out, still long way to go.”
One of the causes for the slump has been margin buying — people buying stocks on borrowed money. As prices fall and share holdings become worth less, investors are being asked to give banks more money to keep up the balance of their accounts — so-called “margin calls.” This is forcing people to sell shares to raise cash, which in turn lowers prices because everyone in the market is a seller.
Deutsche Bank’s macroeconomic analyst Jim Reid is also flashing warning signals over China, saying Monday: “We need to keep an eye on this story this week as there’s a danger Greece could distract us from what would otherwise be the main story.”
Deutsche Bank say that even if shares to continue to plummet, it’s unlikely to lead to the same kind of deep recession as the US experienced in the 1930s after the Wall Street Crash.
Analyst Zhiwei Zhang says China’s banks have relatively little exposure to leveraged buying so are unlikely to get burnt. China’s economy is also much more reliant on banks for financing than equity markets. That means even if the current slump continues and companies can’t get access to cash on the public markets, the economy won’t grind to a halt as banks will still be there to grease the wheels.
Zhang’s main concern is that the correction makes it harder to predict what will happen to China’s growth and inflation.
Australian Macquarie agree with Deutsche Bank that the slump is unlikely to have much impact on ordinary Chinese, saying: “We are more concerned about the negative impact on China’s financial reform, i.e., whether intervention under pressure would cause policymakers to slow the pace of financial deregulation.”
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