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China's Stock Crash: $3.5 Trillion Wiped Out, $2.6 Trillion Frozen
An anonymous reader writes: The stock market crisis going on in China is notable for the huge numbers involved. $3.5 trillion ($3,500,000,000,000) in value has been wiped out by falling prices, and over a thousand companies have forced a pause in trading. The combined value of all of these companies exceeds $2.6 trillion, and it represents about 40% of the total market capitalization. This follows attempts by the exchanges and the government to instill confidence in trading once more, but investors are still wary. The NY Times has a detailed explanation of how the market got into trouble, and why it's not likely to fix itself overnight: "Put all these pieces together, and here's what we have: a rise in Chinese share prices in the last year that seemed to be driven more by investor psychology than by anything fundamental. It is hard to see how the prices as of a month ago were justified, and easy to see why the sell-off of the last month would occur. That, in turn, implies that Chinese officials are fighting an uphill battle in their policy moves to try to stop the correction, and helps explain why their policy actions have had little effect so far."
As I'm writing this:
Shanghai's average P/E is 17.31.
( Source: http://www.sse.com.cn/market/d... )
Dow Jones Ind Avg P/E is 16.2.
( Source: http://www.wsj.com/mdc/public/... )
1. The idea is to buy low and sell high. Prices aren't low yet.
2. A lot of people in China bought at very high valuations and hoped to sell at an even higher level to a "greater fool" to make a profit. This is called greed, and these people are in pain. Especially since so many of them bought on margin.
On the up-side, the gov't has been pouring tons of money into infrastructure (partly fueling the bubble), and they still control their own currency. So they have some room to maneuver. And with a technocratic, authoritarian gov't, they have some leeway to take drastic measure that would be difficult if not impossible in a democracy. It will be interesting* to see how this plays out in the coming days and weeks.
* BTW, about that Chinese curse "May you live in interesting times," after decades in Asia, I have yet to find a native speaker who can tell me the original Chinese. So it seems this curse is apocryphal, most likely invented by a Westerner as a joke.
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The most interesting factoid in the links is:
The Chinese stock market has dropped 26% in a month and The Chinese stock market is up 83% over the last year. Both are factually accurate.
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