BullionStar: China’s Stock Market : A short summary of the rout and what lies ahead

The almighty Shanghai Stock Exchange Composite Index has been one of the best performing financial asset, hitting a 7 year peak in the middle of July and having risen by more than 150% in the past 12 months. Shocking then, when it starting plunging and plunging with 30% of it’s market value lost in the following 3 weeks. The sell-off is incredible considering that 80% of the index consist of retail investors and not the traditional huge institutional investors. The high retail investor percentage in the index has been due to the availability of cheap credit made available and the availability of margin lending by brokers.

What happened after the plunge?

In the wake of the plunge, the Chinese government intervened and allowed almost half of the companies trading on the Shanghai Stock Exchange Composite Index to suspend trading of their shares to prevent a further loss in value. Investors who were leveraged to the tilt had to close their margin positions. Furthermore, those who paid in cash panicked and started to sell as well.

What did the government do?

Understandably, the Chinese government is alarmed at the rate at which the index fallen and have introduced several measures to try and turn the index around. Since the investors are mostly retail investors, there are fears of social unrest if the situation is not turned around quickly enough. The government is working to buy shares from small and medium sized companies, who are the most affected by the rout. They have also suspended any upcoming Initial Public Offerings (IPOs), as well as banned anyone who owns more than 5% of a company from selling any shares for the next 6 months.

What happens next?

The Shanghai Index seemed to have recovered in recent days, owing in part to the measures of the government and also partly due to the agreement of a bailout deal for Greece. However, much uncertainty remains in the year ahead with many investors fearing the slowdown of the World’s second largest economy, even if it did grow 7% for the past three quarters in recently released news.

In uncertain times like these, it makes sense for investors to hold their investments in something they can hold and only precious metals offers you an investment that has intrinsic value and can retain value. Even though the price of precious metals have been falling, the opposite is true for physical demand. Our retail outlet has been swamped with orders and we are trying to fulfill them as best as possible. Don’t get caught holding paper Gold and Silver, where paper Gold and Silver market makers can get halted for trading much like half of the companies on the Shanghai Stock Exchange Composite Index.

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