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China Stocks Are Crashing

Despite a slowing economy in China, stock values were sky rocketing through May due largely to government encouragement to invest in the stock market. Turned out to be real bad advice.

The Shanghai Composite Index slid another 5.9 per cent today despite the Chinese government’s efforts to stop the sell-off. The Christian Science Monitor is reporting today that “a three-week plunge has wiped out $572 billion in value on the Shanghai and Shenzhen exchanges. Today nearly half of all listed Chinese firms have simply suspended trading, and investors are anxious.

The Wall Street Journal is reporting today,

When Chinese stocks started to crumble in mid-June, the drop forced investors to unwind some of their leveraged bets, sparking more selling.

The government has rolled out one measure after another to stem the rout. But rather than reassure, the frenzy appears to have heightened anxiety.

“The more the government intervenes, the more scared I am,” said Li Jun, who runs a fishing and restaurant business in the eastern city of Nanjing. Mr. Li has spent about 3 million yuan on stocks since early this year, using borrowed money for about a third of that amount.

He was among the legions of investors who have cut their shareholdings in the past few days. Mr. Li said he has steadily reduced his position every time the market “popped up a little” due to the government intervention.

“I have no faith” in the government’s ability to halt the losses, he said.

Middle class wealth has been devastated.

The Sydney Morning Herald describes government efforts to stop the sell-off.

China’s securities regulator banned major shareholders, corporate executives and directors from selling stakes in listed companies for six months, its latest effort to stop the nation’s $3.5 trillion stock-market rout.

Investors with stakes exceeding 5 percent must maintain their positions, the China Securities Regulatory Commission said in a statement. The rule is intended to guard capital-market stability amid an “unreasonable plunge” in share prices, the CSRC said.

While China has already ordered government-owned institutions to maintain or boost their stock holdings, the CSRC’s directive expands the ban on sales to non-state companies and potentially foreign investors who own major stakes in mainland businesses. Regulators have unveiled market-boosting measures almost every night over the past 10 days, steps that have so far failed to revive investor confidence. Foreign traders sold Chinese shares at a record pace this week in part due concerns over the government’s meddling in markets.

“It suggests desperation,” Mark Mobius, chairman of Templeton Emerging Markets Group, said by phone Wednesday. “It actually creates more fear because it shows that they’ve lost the control.”

Stay tuned.

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Frederick Leatherman

Frederick Leatherman

I am a former law professor and felony criminal defense lawyer who practiced in state and federal courts for 30 years specializing in death penalty cases, forensics, and drug cases.

I taught criminal law, criminal procedure, law and forensics, and trial advocacy for three years after retiring from my law practice.

I also co-founded Innocence Project Northwest (IPNW) at the University of Washington School of Law in Seattle and recruited 40 lawyers who agreed to work pro bono, assisted by law students, representing 17 innocent men and women wrongfully convicted of sexually abusing their children in the notorious Wenatchee Sex Ring witch-hunt prosecutions during the mid 90s. All 17 were freed from imprisonment.