The Shanghai Composite index bounced back on Thursday gaining 5,8%, following government intervention that started with lowering interest rates, escalated with direct asset buyingand ended up with the barring of major company shareholders from trading for the next six months.
Still, yesterday’s bounce back was impressive recovery and constitutes the biggest rise in a single day since March 2009, with most stocks gaining as much as 10%. Of course, the crisis is anything but over.
For three consecutive days China experienced a panic selloff. This was a climax of two weeks in which the market was volatile, during which, the world has been holding its breath. The Shanghai Composite index dropped by 30% and € 3,2 trillion of value evaporated. That is equal to 10% of globally traded financial capital.
At least 25% of the companies listed in Shenzhen and Shanghai are not currently traded, which means that the rise does not reflect the strength of the market as such. As a result of government intervention, for example, more than $ 1 trillion stays in the country, or 20% of the market.
Bubble bursting is an understatement. More than 80 million Chinese are trading in the Chinese capital markets with stocks gaining $ 320 bn in value over the last year. Some listed companies are valued 85 times their annual earnings; in 2007-8 the highest valuation for US companies was about 20 times their earnings.
Fear of capital flight from China is feared could trigger contagion across emerging markets. This is because economies dependent on commodities, such as Russia, would be losing revenue. Moscow sees oil dropping to $56 a barrel, that is, a three month low; Copper, a key export for countries like Chile, is already falling.
In such a volatile environment, with continuous capital flight towards the US, a Grexit might mean markets soon move to test the next weaker link in the Eurozone, spelling contagion in Europe. Italy is an obvious target.
This money would seek “refuge” in the US, which is not a good thing. On Wednesday, New York’s Stock Exchangeclosed, apparently due to a technical problem. This technical issue came just as a dangerous selloff was escalating with panic coming from the combination of news about Greece and China. In its annual report, the IMF already warned the Fed to delay increasing US interest rates, following the completion of the Quantitative Easing program in February (QE). A considerable rise in US dollar exchange rates would hurt exports and earnings for US companies.
The situation in China comes as most of the world was looking towards the Chinese market to boost growth and recovery. In addition, China is the biggest investor in US bonds and no one knows how a slowdown in the Chinese economy would affect an already weakened bond market.
http://www.neurope.eu/article/when-china-met-grexit/