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2015-08-25

Race to the Bottom: Chinese Stocks Crash, China Lowers Interest Rates

S&P 500 Index 1-day chart 25 Aug 2015 (source: google.com)
UPDATE August 25, 2015: Rally in US stocks failed in final hours today--Relief Rally Evaporates in U.S. Stocks as China Anxiety Bubbles - Bloomberg Business: "A rebound that took the Dow Jones Industrial Average up more than 440 points disappeared as traders said trepidation over what will happen in China’s market made holding on to stocks too risky for most investors. The 30-stock index slid 1.3 percent to 15,665.77 at 4 p.m. in New York, down 4 percent from its highest point. The peak-to-trough retreat matched Monday’s selloff, when concern about global growth ignited the worst selloff in four years. The Standard & Poor’s 500 Index went from up 2.9 percent to down 1.4 percent, with most of the selling concentrated in the final two hours of trading."
--end of update--

Chinese stocks crashed again today, 25 Aug 2015,--biggest plunge since 1996--and China's government, desperate for answers after devaluing its Yuan currency and imposing controls on China's stock markets, lowered interest rates and reduced cash requirements for its banks.

How bad is the situation, really, in China? How desperate are Chinese leaders? Answers below.

China to Flood Economy With Cash as Global Markets Lose Faith - WSJ: "...“Views about China’s economic prospects appear to be shifting from serious concern to near panic,” said Eswar Prasad, a Cornell University professor and former China head for the International Monetary Fund ... some big-name Chinese technology companies are reporting softening markets. Electronics maker Lenovo Group Ltd. [domain name: lenovo.com] called the past quarter “perhaps the toughest market environment in recent years.” Phone maker Xiaomi Corp. [domain name: mi.com], which had ridden the wave of first-time smartphone buying in China to rack up triple-digit growth in recent years, now has to look for such growth elsewhere. For the first time in six years, China’s smartphone sales are declining."

Chinese Stocks Crash Again to Extend Biggest Plunge Since 1996 - Bloomberg Business: "The Shanghai Composite Index tumbled 7.6 percent [Tuesday, August 25, 2015] to 2,964.97 at the close, sinking below the 3,000 level for the first time in eight months. The gauge has dropped 22 percent in four days since Aug. 19. More than 700 stocks fell by the 10 percent daily limit in Shanghai on Tuesday, including PetroChina Co., the nation’s biggest company by value."



Expect a bounce in today's US and European markets, but will it last?

What do they call that on Wall Street? Oh yeah, a dead cat bounce.

See also: China's stock market crash, explained in charts - Vox, and note #11: Chinese trusts are making highly leveraged bets--This practice of making investments with borrowed money is known as leverage, and it's not just individual Chinese investors who are doing it. Trusts are a bit like American investment banks or private equity funds: They provide investment opportunities for wealthy clients. And in recent years, they've become a popular way for those clients to evade limits on buying stocks with borrowed funds. This (use of "high leverage") never ends well.