The Chinese Stock Meltdown That Makes the Greece Saga Look Trivial

The bear market by the numbers, below

The Shanghai Stock Exchange Composite Index has lost 28 percent since its peak on June 12, the worst selloff in two decades. About $3.9 trillion in market valuation has evaporated, more than the total annual output of Germany—the world’s fourth-largest economy—and 16 times Greece’s gross domestic product. The benchmark is still up 82 percent in the past year, the most among the world’s major markets.

 

As shares tumbled, companies rushed to apply for trading suspension. More than 1, 400 companies stopped trading on mainland exchanges, locking sellers out of 50 percent of the market. The China Securities Regulatory Commission also banned major shareholders, corporate executives, and directors from selling stakes in listed companies for six months.

Chinese stocks have become the most volatile among major markets after Greece. A measure of 30-day price swings on the Shanghai benchmark reached 56, the highest since 2008. The volatility is more than five times that of the Standard & Poor’s 500-stock index.

Investors who borrow money from brokerages have amplified the boom-and-bust. A fivefold surge in margin debt had helped propel the Shanghai index up more than 150 percent in the 12 months through June 12. On the way down, leveraged investors unwound their holdings to repay the loans, amplifying the crash. While margin debt on the exchanges has declined by 823 billion yuan ($133 billion) since the mid-June peak, to 1.44 trillion yuan, it’s still more than triple the level from a year earlier.

Officials have unveiled market-boosting measures almost every night in the past two weeks. A group of 21 brokerages has pledged to invest at least 120 billion yuan in a stock market fund, taking a page from the playbook used by J.P. Morgan and Guaranty Trust Co. during the 1929 U.S. crash. Regulators have banned major stockholders from selling stakes in listed companies, suspended initial public offerings, and restricted short selling.

While the efforts have helped boost the largest stated-owned companies—oil giant PetroChina has gained 22 percent since June 26—they have so far failed to revive overseas investors’ confidence. Dual-listed Chinese stocks traded 33 percent lower in Hong Kong than on the mainland, the biggest discount since 2009, suggesting investors abroad are more pessimistic than the locals on the valuation of the companies.

Additional losses threaten to drag down further the slowest economic growth since 1990 and stir social discontent. The world’s second-largest equity market now has more than 90 million individual investors, which is higher than the number of Communist Party members.

Bloomberg, by Ye Xie