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China’s stock market plunge continues

While most of the global economic news centers on Greece, the Chinese stock market has lost $3.25 trillion.  The Shanghai Composite Index has lost more than 25 percent of its value since mid-June, the Shenzhen Index is down even more.  The latest reports say more than 700 companies, roughly one-fourth of all the businesses on the two big exchanges have stopped trading.

What makes the plunge even more dramatic is the markets more-than-doubled their value from January to June.  Much of that surge was done on borrowed money.  However, even with the current plunge, the market is still 80 percent above a year ago.

In an effort to stop the tumble, the Chinese government has intervened on several fronts including a halt to all new IPO offerings and urged brokerage firms to invest $120 billion Yuan ($19.3 billion) along with the People’s Bank of China to help stabilize the market.  There was a positive reaction in the markets on Monday but the slide returned on Tuesday.

While the actual dollar amount of the loss is staggering, the reality is the stock market is not that big of a deal in China.  Less than five percent of business financing is through the stock market and the exchanges represent less than 15 percent of China’s household financial assets.

The bigger threat seems to be to the Chinese government.  The surge in the stock market earlier in the year was seen as an indicator of the success of government economic policy.  The current slide is not playing well in Beijing.