The Bigger They Are the Harder They Fall

20 Tamuz 5775

The Silent Crash

With the world's attention focused on Greece, almost no one is talking about what's happening in China...

Chinese chaos worse than Greece

...A stock market crash there has seen $3.2 trillion wiped from the value of Chinese shares in just three weeks, triggering an emergency response from the government and warnings of “monstrous” public disorder.

...Experts fear it could turn into a full-blown crash introducing even more uncertainty into global markets as Europe teeters on the edge of a potential eurozone exit by Greece, after Sunday’s controversial referendum.

Citi: China's 'Wall Street Crash' is going to get worse

China's stock markets are in turmoil right now, with the benchmark Shanghai Composite collapsing 29% in just the last 3 weeks.

The collapse closely mirrors the Wall Street Crash in the US in 1929 and the Chinese government has been desperately scrambling to try and stop the fall. The People's Bank of China has cut interest rates, relaxed rules, banned short selling and is now getting brokerages to buy up stocks to prop up prices.

Despite the latest measures, which Chinese state media is saying will solve things, Citi thinks China's indices have further to fall.

In a note sent to clients Monday, Citi analyst Jason Sun and his team say Chinese stocks "still [have a] long way to go."

Citi say: "Despite the sentiment help, we believe continued deleverage, and possible reform concerns given recent administrative intervention, will cap index upside. We estimate one-fourth margin buys forced out, still long way to go."

One of the causes for the slump has been margin buying — people buying stocks on borrowed money. As prices fall and share holdings become worth less, investors are being asked to give banks more money to keep up the balance of their accounts — so-called "margin calls." This is forcing people to sell shares to raise cash, which in turn lowers prices because everyone in the market is a seller.

Deutsche Bank's macroeconomic analyst Jim Reid is also flashing warning signals over China, saying Monday: "We need to keep an eye on this story this week as there's a danger Greece could distract us from what would otherwise be the main story."