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big_picChina’s stock-market crash is just beginning

 

 

This is a marketwatch.com article

 

Written by Howard Gold

Since the Shanghai Composite index dropped from a 52-week high around 5,178 on June 12, it’s been downhill all the way.

In just three weeks, stocks listed on mainland China’s most prominent exchange tumbled 30% from their seven-year highs. The even more speculative ChiNext Index has lost 42% of its value over 21 days.

Investors and traders who piled into Chinese shares over the past year, causing Shanghai to rise 150% and other markets to catapult even more dramatically, faced margin calls on their highly leveraged positions and started selling with both hands and both feet.

It was the biggest rout in this volatile market since 1992, and it prompted the Chinese government to take strong measures.

Last week, the Bank of China cut short-term interest rates for the fourth time this year. Regulators relaxed margin requirements and cracked down on short sellers, while state-run media tried to calm jittery investors with happy talk. That did little to stanch the hemorrhage.

Over this past weekend, government authorities and “private” Chinese brokerages and companies announced even more dramatic moves to prop up stocks:

• Brokerages and mutual-fund companies said they would buy billions of dollars’ worth of Shanghai shares.

• A state-owned investment firm said it would buy China-based ETFs.

• Twenty-eight companies said they would put planned initial public offerings on hold, as IPOs had been the focus of the most intense speculation.

• Regulators also increased the kinds of assets that can be used as collateral to buy stocks, to include — are you ready for this? — people’s homes. I’m not making this up.

The goal: Show retail investors that the all-powerful Chinese government had their backs and that the “Beijing Put” was alive and well.

Except it wasn’t. Shanghai opened up a strong 8.5% on Monday, despite Greece’s resounding “no” vote in Sunday’s referendum. But shares slipped throughout the trading day and closed up only 2.5%. On Tuesday, Shanghai slipped 1.3%, and on Wednesday plunged 5.9%.

That was a clear sign that the government had taken its best shot and failed. Which means that the most likely direction for Shanghai, Shenzhen and other mainland exchanges is down, down, down.

Morgan Stanley, which made a good “sell” call on China weeks ago, now expects Shanghai to fall as low as 3,250 by mid-2016. Citigroup analysts told clients the selloff has a “long way to go.”

I agree, but I think it could go much, much lower.

The underlying problem is that the investing culture is immature

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