Understanding the Chinese crash of 2016

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Understanding the Chinese crash of 2016

 

The Chinese crash of 2016 was a one of its kind shock to the Chinese economy, that began in the early 2015 and stretched till late 2016. The turbulence was well evident in the dropping numbers of the biggest stock exchange of China, the Shanghai stock market that feel by almost 30% in the month of July.

Companies went straight into losses and bankruptcy, when almost 1500 companies went for a trading halt and despite numerous attempts of the Chinese government to figure a way out of this mess, the stock prices kept falling till the market reached its all-time low in August, 2015.

China being one of the biggest and the fastest growing economies of the world, this turbulence not only affected the economy alone but also triggered a big downturn in the global financial market. It was expected that this might even lead to another huge ‘irrecoverable’ financial crisis!

Looking at the biggest WHY of this event, it was evident how the 2008 global recession had shaken the economy, forcing the government to borrow resources from the public and the private sectors to fund its infrastructure rebuild. However, on the contrary, this led to huge piles of debt for the government and drastically falling GDP growth rates. Also noteworthy is the fact that the Chinese stock market has always been driven by its retail investors. Post the crash, the economy was in such trouble that it started inviting anyone and everyone to invest which eventually led to the beginning of another chaos.

This situation quite resembled the Great Depression of 1929, as stated by many world economists; with credit expansion, loose monetary policies and an optimism that asset prices would never fall that eventually led to crippling stock prices and a market crash.

This made the investors nervous and critical of returns, the volatility of the market had huge doubts and the government’s unsuccessful measures to turn the clock upside down went in vain. As the markets continued to tremble, the blame was put on foreign speculators and hedgers; however, the final hearing questioned the government of the country that had always been trying to use the stock market as a strategy to correct the realm of the declining real estate prices and its growing indebtness. It was observed that the government had clearly failed to rescue the stock market and had always, instead, used the market to attract more and more investors in quantity, thus, compromising on the quality of investors.

This fall was also reflected in CSI 300, an index of the country’s biggest stocks, that fell by almost 8%. The small capital stocks were even worse, falling by a rate of around 10% a day. The currency rate was also effected, falling by 0.6% against the dollar, clearly indicating that the nation was in trouble.

However, it is interesting to know that even when the economy was doing pretty well in the past years, this fall was well predicted. There were many economists who had argued that the Chinese economy was falling the example of many nations that came before, like Japan and Brazil. For all these instances, the government had put forward policies that artificially boosted investments, steps that lead to bright growth numbers on the outside but eventually led to huge imbalances and crashes in the long run.

As a concluding statement, clearly the Chinese economy almost prepared itself for the crash, getting into a situation where it was nowhere easy to suppress the measures that it had taken over the past decade and those that actually led to the spoil.

 

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