Meanwhile in China....

Generali

http://www.ft.com/intl/fastft/351461

So, just in case the intra-day volatility wasn't giving enough of a hint that something was amiss, the index is now down 21.55 per cent from its June 12 peak of 5166.35. (Bear markets kick in after a 20 per cent decline from a peak.)


The Shanghai Composite was up 2.49 per cent in early trade after the People's Bank of China's [PBoC] decision on Saturday to cut interest rates to a record low, but then sold off to be as much as 7.58 per cent lower. An afternoon rally trimmed losses to 3.34 per cent.

Bear in mind that share prices can only change by 10% in a day: more than that the shares get suspended for the day. If the market as a whole was down by 7.6% it's a fair guess that quite a lot of stocks on the market were suspended today.

There has been quite a boom recently in Chinese stock prices, a rather 1929-style rise in fact as it was based almost entirely on 'margin trading' (where you borrow part of the money to trade your shares). The PBoC has pumped huge amounts of cash into brokerages to keep them afloat using something called a reverse repo, basically a sort of loan secured against a financial asset, usually a bond, as opposed to a physical asset like a house. The PBoC has also changed rules regarding the amount of cash brokers have to hold in reserve.

Basically the PBoC has done a huge amount to prop up the market in the hope of an orderly unwinding of the bubble (can a bubble be unwound? anyhoo).

Since the June 12 peak, the value of Chinese stocks have fallen by ~$2,500,000,000,000 ($2.5tn). To put that into context, the Greek Government currently owes ~$350,000,000,000 ($350bn) and the UK's GDP was ~$2.4tn in 2010!

purch

Them BIIIIIIIG numbers :eek:

Generali

purch wrote: »

Them BIIIIIIIG numbers :eek:

Even Chinese GDP is 'only' $9.24tn.

michaels

It is all on paper, for every seller there is a buyer etc etc....

Thrugelmir

michaels wrote: »

It is all on paper, for every seller there is a buyer etc etc....

To conduct a trade you are right. If there are large lines of stock looking for buyers. Then the price will continue to fall until enough buyers appear. So if the sellers have leveraged with cheap borrowed money. Then fingers will get burnt.

Generali

Thrugelmir wrote: »

To conduct a trade you are right. If there are large lines of stock looking for buyers. Then the price will continue to fall until enough buyers appear. So if the sellers have leveraged with cheap borrowed money. Then fingers will get burnt.

Margin interest rates for borrowing in China are usually 20% for retail investors I believe.

kabayiri

Excuse my ignorance here, but who are the people with the "fingers which will get burnt"?

Is this local trader money or are they investing international money?

cells

What is the yield of Chinese stocks of their equivliant to the ftse 100?

Is the whole market ~$10 Trillion?

Also bear in mind that China stock matket was worth about $1 trillion (to the nearest trillion) in the year 2000

what I find more amazing is their fixed capital formation. Just from 2010-2020 they will build more homes than exist in all of the USA+UK combined

Generali

michaels wrote: »

It is all on paper

If you're buying on margin putting up a yuan for each 5 yuan of stock bought, a 22% loss is a very real loss. If you time your purchase badly enough you lose more than just your margin, you have to pony up more cash.

Even if you have a stop loss in place, you can't guarantee the price will ever hit your stop loss. Prices don't have to drop 10, 9, 8, 7, 6... They can just go straight from 10 to 6. If you had a stop loss at 8 then you'll get sold out at 6 instead.

(For the uninitiated, a stop loss is when you tell your broker that you are only willing to lose a certain amount on a stock: if the price goes to a certain level she is to sell for you).

IronWolf

It surprises me how heated the Shanghai market is when the Hang Seng is on a P/E of only 11.

michaels

Generali wrote: »

If you're buying on margin putting up a yuan for each 5 yuan of stock bought, a 22% loss is a very real loss. If you time your purchase badly enough you lose more than just your margin, you have to pony up more cash.

Even if you have a stop loss in place, you can't guarantee the price will ever hit your stop loss. Prices don't have to drop 10, 9, 8, 7, 6... They can just go straight from 10 to 6. If you had a stop loss at 8 then you'll get sold out at 6 instead.

(For the uninitiated, a stop loss is when you tell your broker that you are only willing to lose a certain amount on a stock: if the price goes to a certain level she is to sell for you).

But an equal profit will have been made by someone (else) on the way up. Sure those who got burned will have lost out but money is not being injected into or taken out of the economy overall (although of course the real economy can be impacted through changes to investment decisions and wealth affects).