The Chinese stock market decline has been interrupted by a slight rebound on Thursday and Friday, but the situation is far from clarifying itself. The volatility of the Shanghai Stock Exchange at the moment means that literally anything is possible; and even though the Chinese government is attributing the rebound to its urgent protective measures, such as halting initial public offerings, it may as well just be a momentary recovery that could set the stage for a final, disastrous crash.
In any case, while at the moment the situation is dire almost exclusively to Chinese investors, the aftermath of its eventual outcome might prove to affect U.S. investors more than even the Greek crisis, due to the significant economic ties between the two countries considered as the world’s largest economies. In any case, there are several factors which U.S. investors should consider when assessing the Chinese situation and preparing for one outcome or the other.
Firstly, the 30 percent stock market plummet in just a couple of weeks didn’t appear in on itself. It’s rather more of a market correction of a previously largely unobserved meteoric rise which happened during the year before the fall. Just think of it as the Chinese stock market growing past the point of sustainability and now naturally correcting itself. However, that doesn’t mean that market will just correct itself and continue as before the rise – its own volatility could harm Chinese investment groups to the point of the all-dreaded collapse.
Speaking of which, the situation doesn’t concern only a fall in stock prices, by it’s also providing a hard test for overall market functioning. The correction prompts a lot of market-related failures – such as share suspensions, otherwise inappropriate direct intervention and attempts at manipulation from the government. These violent changes in the way that the Chinese stock market functions could leave it crippled and necessitating a long period of sustained recovery until it can work normally.
The whole process can also become a major setback to the financial liberalization process which China is attempting, while it could also be a catalyst for social distrust towards the government. Probably the most solid example in this regard is that of small investors who, enticed by the state to invest in a then-growing stock market, did so just before the plummet and found themselves in an ungrateful situation where most of their investment was squandered. Normally, this translates into resentment towards the government which failed to protect them after heeding its call.
Image Source: Stratfor