“If you look at the Chinese financial system, you look at shadow banking, you look at the amount of leverage, you look at how desperately they worked to keep the stock market up. It looks worse to me than 2007 in the U.S,” Ackman said.
.. Mary Erdoes, chief executive officer of JPMorgan Asset Management, said at the event that China’s equities markets don’t reflect the economy.
“It’s been 25 years of 7 percent growth,” said Erdoes. “No other country has displayed that. Not even the U.S. There’s a lot going on in the economy and it’s completely disassociated with the stock market.”
Why China’s Stock Market Bailout Just Might Work
Faced with an unnerving sell-off in its major markets that at one point had wiped out nearly $3 trillion in value, China has announced a series of measures to stabilize stock prices, including the establishment of a 120 billion renminbi ($19.4 billion) fund for the country’s largest brokerage firms to buy stocks.
China’s Stock Crash Raises New Fears
State-owned media raised confidence in the market even as the broader economy slowed. And the government encouraged the frenzy by allowing investors to useborrowed money to buy stocks. In the second quarter of this year, about 8.8 percent of urban households in China owned stocks, a big jump from 6.1 percent in the first quarter, according to a recent survey.
.. Government efforts to prop up markets, without broader financial reforms, generally do little more than delay the inevitable. A stock market crash, slow-motion or quick, is likely to stir social unrest, which the Chinese government fears. But bailing out investors is likely to fuel more speculation in stocks and other parts of the financial market.
.. Mr. Xi and his officials should also move to provide more ways for households to safely invest their savings. Historically, the country has capped the interest rates banks can pay on deposits, which has encouraged people to pour money into real estate and stocks to get higher returns. The government has taken some steps to raise the interest rate cap, but has reportedly undercut that reform by telling banks not to raise rates, fearing that would further slow down the economy.
Chinese Investors Who Borrowed Are Hit Hard by Market Turn
But there is a major difference between the markets in China and those in the other big economies like the United States. In China, mom-and-pop investors, rather than big institutions, make up the bulk of stock purchases. Such smaller players don’t necessarily have the resources to withstand the volatility.
.. In a May report, Credit Suisse analysts said that margin lending and other forms of borrowing to purchase shares amounted to more than $500 billion, increasing the market risk.
.. Since May, China’s stock market — the second-largest in the world after the United States — has lost nearly $3 trillion in market value.
.. In late June, China’s Central Bank cut interest rates, a move meant to help make buying stocks more attractive than putting money in the bank.