Although China’s stock market is relatively new, its enormous size makes it a huge and overwhelming force in the world economy. China’s two stock markets, Shanghai and Shenzen, combined, fall only second to the size of the New York Stock Exchange.
The Chinese government has no qualms about blatantly intervening in its stock market whenever necessary. In its desire to spur trading volumes, it has in past years, opened up trading to the retail sector, fostering an environment of easy credit that has allowed investors to borrow a total of 365 Billion USD. Even more unsettling is the fact that many of the new accounts that have opened since 2014 were opened by inexperienced investors who decided to invest just to participate in the stock market hype.From farmers to taxi drivers, these new investors exert a heavy influence on the stock market. Despite government intervention, they were still able to cause the market to plummet in August last year and now in 2016. 6% of Chinese investors are illiterate, according to a Deutsche bank report, while around 60% left school at age 15.
It’s easy to look down on the Chinese stock market. Right now it seems fashionable to castigate the Chinese government for artificially pumping trading volume even if business and economic fundamentals would have resulted in much lower yet safer trading levels. Fake bags, fake buildings, fake food, fake businesses and a fake stock market.However, when you glance out across the ocean to the United States of America, you see a similarly flawed stock market.
When the US real estate bubble popped in 2008, the US government had to intervene to prevent the banks from failing. The US government resorted to printing new money to bail out the big lenders. All the years since then, the US stock market (and the world market) has been on a significant uptrend with investors partying on easy credit. However, a lot of analysts see that the stock market party is almost at its end.
Both the Chinese and US stock markets have been tinkered with by their governments. The Chinese government intervenes as a matter of standard procedure, with zero transparency. The United States government acts like it has been cornered into intervening just so it can shield American citizens from pain and save the world from financial Armageddon. Through the years since 2008, the US and most national governments have been kicking the can of pain down the road by engaging in some mild form of market intervention via their economic and central bank policies.
What makes the predicament of the Chinese economy different from that of the US? Well apparently, the Chinese economy could even actually be in a better state than the US.
Even with the huge absolute number of retail investors trading at the Chinese stock markets, these astounding figures only represent a small participation coming from the Chinese economy as a whole. The people who recently got wiped out from investing in the Chinese stock market, as sad a story as they are, only come from a small percentage of the country’s population. Hence, the Chinese economy is not fatally exposed to its stock market. In contrast, a huge percentage of the US population is exposed to the US stock market. A stock market crash will debilitate the US economy and most of its people’s lives.
Another stark difference between the US and Chinese markets is the condition of their governments’ foreign reserves and budgets. The US is the world’s biggest debtor nation and it owes China big time. China can single-handedly crash the US economy by selling its US Treasury Bills. The US can’t do much to China except pretend to scold it a bit for its belligerence in the South China Sea. It’s a bit of a farce when the US says that it will defend China’s neighbors from China’s imperialistic trespassing in the disputed territories of the China Sea. When you consider its financial state of affairs, the US can’t even defend itself- it’s economy – from the Chinese.
In conclusion, although it seems China is the greatest threat to world markets right now, it is not the weakest link in the chain of stock markets and economies. The US seems to be a better candidate for that. No one likes a redux of the Great Depression. However, by delaying financial pain via economic policies and government maneuvering – by kicking the can down the road- governments are just making the pain harder, albeit postponed for the meantime. No one really can tell how long this can go on. Both the US and China are intervening in their markets. The Chinese are socialists and authoritarian, but with a lot of gold reserves and receivables from the US. The US, is democratic, magnanimous to all individuals, but spends more than it has and is a debtor to China.
Makes you wonder who should be learning from who.