Published: September 11, 2015
JORDAN DEN HERDER
China’s market has seen both sides of the spectrum so far in 2015. After seeing an outstanding rise of around 150 percent in the 12 months before June, the tide seems to have finally turned on China’s ever-bullish market, causing it to drop 11 percent in one week alone. Investors in all countries are unsure of how to react to the most recent drop off. Germany’s DAX performance index dropped as much as 22 percent, the Dow Jones Industrial average dropped 11 percent and Japan’s Nikkei index fell 15 percent. To add to the turmoil, commodities and currencies have also slid a considerable amount during this time. What is the next step to stay afloat while in this worldwide slump?
A popular opinion among analysts compares this downward spiral to the “dotcom” 2000 market collapse, or even the financial crisis of 2007. China’s market was a bubble, growing at much too fast a rate for too long, meaning that a big burst was eminent. If the similarities remain true, then China still has rough days ahead before a turnaround One question that reveals itself is the cause of this burst, whether China’s economy is beginning to struggle or whether inflated equities are just correcting themselves.
China is still reporting a seven percent growth rate in its GDP. This may sound good, but many experts are skeptical as to whether this number is a farce. “China could be in the world’s greatest depression and they would still report seven percent,” Gordon Chang, a Chinese expert commented. Some even say that there is reason to believe that GDP growth could be as low as five percent, four percent or even two percent, numbers that would seriously hurt almost any country that has connections with the second-largest economy in the world. The Chinese central bank has been moving to devalue the Yuan since early August to increase exports and has been actively buying stocks and lowering interest rates to stimulate its economy. Investors also recently found themselves locked into their investments by the government, which is trying to prevent a panic and artificially keep prices up by suspending most trades. These activities do not indicate a strong GDP growth rate. If this is the case, then companies stationed in China will struggle, companies selling to China and governments trading to China will struggle and everyone will end up with a big loss on their hands. For companies heavily set in China, a lot of ground will have to be made up elsewhere if profits cannot be made, specifically if they had been targeting China, as many have. This would drive investors away from the Asian market and towards the U.S. market, which has been recently stable. The dollar will become stronger in the coming months if global markets stay down and if Janet Yellen, the chair of the Federal Reserve, can finally raise interest rates. Co-Head of the Portfolio Club PRISM on campus, James Jencarelli, stated, “This is a good sign for companies that export a lot to the U.S. as they would benefit from a strong dollar in foreign markets, this could prove to be a great opportunity for us.” PRISM has taken a 5.4 percent drop since June, and Jjencarelli is looking to hedge the risk on the portfolio.
An optimal situation would be that China has seen large market inflation, and people have suddenly realized that their equities are overvalued. This would cause a less-drastic, negative effect because the market would begin to correct itself as people begin to buy back into it. Investors with this perspective look to capitalize on this situation, viewing the price drops as a discounted buying opportunity. “I think soon would be a great time to invest in a Chinese Index or some Chinese companies,” said Michael Hanifin, a student equity analyst for PRISM. “We’ve been trying to hedge ourselves with some more diversified markets, and in the long run this seems like the perfect opportunity.”
However, China’s market has been so positive for such a long time that many were fooled into thinking it was a sure thing. There are a lot of cases where investors bought into the market on margin because of how optimistic they were. Earlier in the year, it was recorded that China had $358 billion worth of margin debt. As a result of the falling market, the investors are now losing money they do not have. This could explain the lowering of interest rates. The Chinese government is trying to help out those who are losing big in the market right now. Unfortunately, this will only help out so much. People are losing money and that will undoubtedly hurt China and those invested in its economy. The upcoming weeks will show the true direction of China’s market and the damage it will have on a global scale.