What Goes Up Comes Down: China’s Stock Market Decline

What Goes Up Comes Down:  China’s Stock Market Decline

By Shlomo Maital 

             Between mid-March and early June,  less than three months,  China’s stock market created $3.5 trillion in new capital gains for its investors. Many of them are working people, who scrimp and save and buy shares.  They were richly rewarded.

            Between early June and July 7,  the Chinese stock market fell by one-third, wiping out $3.5 trillion in capital gains.    Over the 12-month period to July 8,  the Chinese stock market is still up by 75 per cent!

           Once again,  for the millionth time, investors learn that whatever goes up, can and will come down.  When it does, it often comes down pretty abruptly.

          The so-called “crash” in China’s stock market has been greeted with what could be seen as a hasty, panicky intervention by regulatory officials, who suspended trading in over 90 percent of the 2,775 shares listed on Chinese exchanges, as the government tries to quell a sell-off.   I still believe that most small investors in China are not selling, are wisely holding on to their shares, and believe, rightly, that they will bounce back.

        It all depends on your time perspective.  If it is a one-month horizon, well, this is a crash.  If it is a one-year horizon,  then, Chinese shares are still up by 75 per cent,  from July 2014 to July 2015.   See the chart below.     

With a bit longer perspective, that one-month 33% drop doesn’t seem as steep, does it?   And I believe most Chinese investors bought in to the market well before the decline of the past month.   If they bought in before March, they are still ahead.   That $3.5 trillion in losses is purely paper, purely perception.  Why not measure the gains between July ’14 and July ’15? 

      There is no need for government intervention.  The model of Hong Kong (Hong Kong authorities bought shares after the 2008 global collapse, and ended up profiting when share prices rebounded) is not one China Mainland should follow.    Sometimes, “do nothing” is the best and wisest policy,  in health care and in financial regulation.