Over the weekend, Beijing took its most aggressive action yet to boost its markets, suspending initial public offerings and lending cash to investors to buy stocks. China’s brokers vowed to buy shares until the Shanghai Composite hits the 4500 level. But the market fell 1.3% Tuesday to 3727.12, putting it down 27.9% from its peak and 17.2% below the promised 4500 level. More worrying is that the market performed worse than the index makes it seem.
So while their market whips around and China's government attempts to get order (aka the uptrend) restored, we thought that finding some historical perspective in which to place this market action would be helpful. Fortunately, the New York Times offered just that in an article yesterday by Neil Irwin. As it turns out, the meteoric rise and subsequent plunge in Chinese stocks isn't all that out of the norm.
He goes on to illustrate (citing Bloomberg) just how much more volatile Chinese equities have been relative to an index of global stocks over the last decade. They saw incredible volatility in the 2007-2008 boom/bust cycle and then several times again after the 2009 bottom. Partly to blame, he says, is the Chinese stock market being less developed than its counterparts and the companies that do actually list on a Chinese exchange commonly have questionable business models and accounting protocol.
We'll be watching to see what, if any, policy response by the Chinese government can help to ease the current rout in stocks. Until then, investors over there are likely to feel further pain as forced margin calls and trading halts mount by the day.