POP! Goes the market?!? Well that is what some are saying about the Chinese Stock Market this last month. After Shanghai Composite, an index that tracks all A-shares and B-shares listed on the Shanghai Stock Exchange lost over a third of its value in less than a month. While not even a month ago many were rejoicing on how much they had made in the market when the Shanghai Composite hit record highs. Now, those same folks are scrambling to cash in on whatever value their shares have left. Which begs the question, how did this nosedive happen? And more importantly, what is being done to reverse this plunge?
But first we must explore what caused the surge of stock buying in the first place. After all, you must know where you come from to know where you are going, right? So here it is: as a result of the 2008 global financial crisis the Chinese Government was making moves to join the global market place. One of their methods was to encourage its people to start investing money into the market after efforts failed in the real estate sector. To entice investors into the equity market, retail investors like you and I could go down to our local brokerage house and open up a margin account with little more than a few dollars and good faith. A margin account is an account that allows the investor to borrow money from the brokerage to cover a portion of a securities purchase. By June, China’s margin debt had reached a record breaking $370 billion, which is a 123% increase year to date.
Coupling the large increase in margin debt and a startling 20 million new trading accounts opened in the first half of 2015, quickly caused an overvalued market. And as the saying goes, what goes up must come down. What do I mean by that? You guessed it ladies and gentlemen, a market correction. Nothing can go up forever. A market correction is a way for the market to stabilize itself. But one of the reasons this correction took a nosedive was all the margin calls that were triggered. A margin call happens when the value of securities you bought falls past a certain level. When that occurs you are forced to either deposit more money or sell assets to bring your equity value back up. With a lack of readily available cash, many investors were forced to sell assets to meet those margin calls. This in turn created a domino effect throughout then market and within three weeks dropped 30% off its highs. That is a $3 trillion loss (that’s trillion with a T) in less than a month. But even with a 30% pullback the market is still up a whopping 90% over the last 12 months.
As panic set in, investors looked to their government for support, because after all, they are the ones who encouraged this investment strategy. To stop the seemingly free-falling market, the government allowed companies to suspend trading of their shares if they have dropped drastically to help preserve whatever value they had left. Well, that may have helped some companies, but not the investor. For example, let’s say you have a margin account with 10 stocks in it. Of those 10 stocks, 6 of those stocks suspend trading. What are you going to do? Or I guess I should say, what would I do? Sell the remaining 4 stocks. For two reasons — to have enough cash available to cover a margin call, and to get of those positions before they halt their trading as well. This method did not succeed in propping up the market.
So if at first you don’t succeed, try again! Regulators took additional steps to manipulate that market such as freezing all IPOs (Initial Public Offerings), easing of margin lending regulations and banning large shareholders from selling their shares for at least six months. These steps coupled with other global events such as Greece seemingly drawing closer to a bail out policy has boosted the Shanghai Composite in the green the last few days.
But with all of this market volatility going on in China it is important to remember that this is not a direct reflection of its economy. The Chinese markets only account for about one third of its GDP. China is still a huge exporter of goods and services, and though economic growth is slow it is progressing. With only an average of about 15% of household assets invested in the market, I don’t foresee this popped stock market bubble having a drastic effect on its economic growth. Lastly, it is important to understand the risks involved with investing. Here at Verity Credit Union we offer a full service Investment Department that can help you understand the risks of investing and create a portfolio to best fit your needs. Please contact me (Bre Lowry) at (206) 361-5312 to set up a complimentary appointment with one of our CFS Financial Advisors.
Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
Bre joined Verity Credit Union in September 2013 as the Investment Assistant to Ken Butler and Gavin Chinn. She attended Central Washington University, where she studied Clinical Physiology, Facility Management and Economics.
“I have always had an interest in learning more about the financial world. I am excited to take my education and marketing experience to grow our investment department and serve our credit union members.”
When Bre is not working she enjoys time with family and friends; she loves running, Mexican food and spotting at auctions.
“A goal is a dream with a deadline.” — Napoleon Hill
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