There has been a lot of concern regarding the actual status of the Chinese economy as the Chinese stocks market has lost around $4 Trillion of its value since last month. The decline was powered by a snowball effect known in the financial industry as forced margin liquidation. As investors who bought shares on margin were unable to meet margin requirements as the market plummeted lower and lower, resulting in those trades to be liquidated by their brokers. Which in turn resulted in even more selling. This kind of chain reaction takes place at times when there are a lot of bubble stocks in the stock market and too many speculators, but there is no further room for solid upside because there is no long term economic value to justify such higher prices.
According to US billionaire Paul Singer who is also a hedge fund manager, the longer term effects and concerns about the status of the Chinese economy are far more severe than those regarding any other country, and even more serious than the problems of the Eurozone which themselves are severe enough. The recent decline in the Chinese stock market underlines greed and shadow finance practices such as the ones that created the late 90s bubble market in the US. If the Chinese economy starts to contract as a result, then it can impact the world economy in some ways as it would mean slower growth in China, smaller imports of raw materials from countries such as the US, and an overall questionable future for the Asian economy as a whole.
China not only exports $billions in all kinds of goods but it also imports a lot from many other countries. China for example is the biggest export market for German and Italian luxury cars, a slowdown in those sales will immediately affect those European car makers. China also imports vast quantities of raw materials and precious metals, a recession in China will simply mean lower prices for copper, and gold. Gold in particular is already in a down trend and could fall much more from today’s levels if industrial demand goes down. The implications of a recession in the Chinese economy go on and on, as the economy is really large.
On a different note, other analysts believe that the Chinese system of shadow banking practices and obscurity in the way the economy works, has allowed the stock market to decouple from the actual Chinese economy. And that the correction occurring in the stock market is not reflective of the actual Chinese economy, in contrast to the US economy where its status is fully reflected in the main stock market indices.
The one thing all analysts agree on, is that stock prices in China were fuelled by greed and margin trading, and that is true in many markets including crude oil and gold as well. When prices rise too much, too fast there is bound to be a correction, especially when the price trend goes parabolic. The objective now for investors is to focus on more valuable assets because volatility in the Chinese stock market will likely remain high for quite a while.
According to Paul Singer the Chinese crisis will be much bigger than the subprime mortgage crisis in the US. If this proves to be the case then it will really impact the lives of all Chinese citizens, as a financial crisis is bound to bring structural reforms and drastic changes everywhere in the country. If a recession is really about to hit China, millions will lose their jobs, not only within China but all across the world. So many companies export to China that their sales and profitability will be severely hit, this is because everything in China is big. The luxury car market alone is so big, that the European car makers had to work at full productivity pace in order to keep up with demand, and this is only one example of an industry outside of China that may be hit hard. Regardless of what the reality is, the psychological aspect alone is very negative at the moment, as a crashing stock market only helps in creating a negative economic environment, and repelling foreign investors away from China. Hence the stock market is unlikely to recover any time soon, even if the opinions of the analysts are wrong about a coming recession.