As I was following the situation in Greece, and the market fluctuations that were provoked by the obstination of the Greek government in its belief that Europe will bend to their outrageous behavior, I realized how Lilliputian this question was. Its political importance was largely exacerbated by the inability of Europe to have a consistent and strong line.
In the last few days, however, the $400 billion of Greek debt took a new dimension. The Chinese markets lost almost 40 percent, more than $3 trillion. 50 percent of the shares no longer trade and the government had to extend a lifeline of 40 billion dollars to brokers. Structured products show -as predicted- their ugly face: an unnecessary layer of complexities that hide the nature of the risks.
The Government responsibility.
At the source of this crisis has been the encouragements given by the Chinese government to individual investments in stocks and shares, it is also its inability to curtail the size of shadow banking and "financial innovation" that was often disguising margin financing.
Prime Minister Li was in Europe when the short sellers started to massively launch their attack. He is now fully in charge.
A social problem
It was ill-advised to target individuals.
Uneducated or mobilized "for the good of China", they represent 80 percent of the Chinese market. The reverse of the U.S. market. This is why the government used all its possible means to correct the trend.
The volumes are staggering., The entire market capitalization of the listed companies was traded in the last two weeks.
While the index tumbled "only" by about 40 percent, it hides the fact that the companies outside of the index saw their prices reduced day after day by the 10 percent maximum decline, only to interrupt the trading.
The impact is on the people of China. This is why the government has to deliver on its promises of a paradise in the world of always-raising equities.
Ineffective action
The combination of the various institutions that the Government can use to counter this decrease should have been largely sufficient. But the Government let leverage explode the market. It went up 150 percent in one year for no particular reason. This is therefore a correction.
Intervening now is a waste of money and resources when a new low resistance level will be found. That is,. of course the theory. In the absence of a strong institutional support, it might take time.
China is till an overvalued market
It took one year to the Chinese market to increase 150 percent and one month to lose 40 percent. Before the crisis, the Shenzhen market was having an average multiple of 70 times earnings. The correction is far from finished,. especially in an economic context where double-digit growth is no longer realistic.
Last year, the authorities allowed the issuance of products called Insurance Asset Management Companies. They have nothing to do with insurance: they are a security that allows the brokers to borrow and leverage their clients. They were the hot cakes of last year and the soufflé is now busted.
The combination of an overdue correction and overleverage is lethal. Shanghai does not listen to Beijing. It has its won logic. the shock waves in China only start to disturb the economy, and start being felt in Australia and New Zealand and through what is called "Greater China". One thing is certain, the Chinese dream might become more modest and realistic.