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China Stock Market Rout Will Stablise

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By William Mills

London's Financial Heartland
London’s Financial Heartland

 

Bloomberg makes grim reading with a headline comparing China’s recent stock market fall with the Dow Jones 1929 crash.

The Telegraph adds to the woes with Bank of America claims that China’s banks are going to face the music.

Yet if we look more closely at the Bloomberg share indicators for Asia [markets>Asia>China] we observe a great disparity between China’s Shenzhen, Shanghai, and Hang Seng indexes. The mainland indexes of Shenzhen and Shanghai range between 33% and 87% higher than a year ago, even after the recent crash.

The Hong Kong based Hang Seng indexes are somewhat different. These vary between -6% and +14% on a year ago.

If the same shares are being traded at wildly different prices on different Chinese exchanges something has got to give.

After all in Europe, for example Shell’s B shares traded at 1,760 and their A shares were 1,730 demonstrating that different classes of shares in the same company can be traded successfully, but in China the gap is far wider so an internal correction has been on the cards for awhile.

The assertion that individuals have borrowed money to buy shares and are going to be burnt to the extent that the lending banks will get into difficulty themselves needs to be carefully analysed against how much in total has been lent by China’s banks and what proportion of that is unsecured lending for speculation.

The Chinese Government has forbidden larger shareholders from selling. These were probably the first in and sitting on large profits, and want to get out, leaving those who arrived late and using borrowed money to suffer the losses.

Until China’s mainland stock markets are at levels 20% below last year’s any talk of crashes is premature.

However the area to watch is Hong Kong’s Hang Seng indexes. In the last month they have dropped in a similar fashion to their more volatile mainland counterparts.
If they continue to drop we may have a crash on our hand. Yet if Hang Seng levels out at last year’s prices while it waits for the mainland indexes to catch up then it all we have experienced is a Chinese correction.

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