Chinese stocks rebound after losing for 2 days
China's stock exchange Shanghai Composite index gained almost 6 percent after its sharp dip in the last two days. More than 1,400 companies on the country's 2 main exchanges halted their trading in order to stop the further fall of the stocks. The market had been surging over the last year because of borrowed money.
China's biggest stock market came crashing down by 32% in a span of 3 - 4 weeks, consequently wiping $3 trillion of wealth. Equities in Asia, U.S. stocks and metals like copper are the ones that were being affected by this Chinese mayhem. Roughly half of all listed companies withdrew from the market, something which is legal in China.
This is the second time that Chinese stock market has crashed in the decade. Earlier it had crashed, falling below 2,000 at the end of 2008.
There was a surge in the Chinese market with more than 40 million new accounts being opened between June 2014 - May 2015. The worst hit are the common Chinese shareholders who invested heavily in the market. China's stock market boom was based on borrowed money; a whopping 2.2 trillion yuan ($350 billion) of stocks were bought with borrowed money.
Fund managers fear that China could make the global funds more averse to risk. Retail investors will be affected by the volatility created by the crash, at least for now. China being a manufacturing hub, excess capacity could delay revival elsewhere. China may dump even more products and could harm local markets in the process.
According to trade analysts, China's stock market's downward spiral could mean that India can come to the forefront as the alternative investment destination. There could be a drop in air fares because of softer oil prices and airline stocks are likely to go up. Inflation dip may lead RBI to cut interest rates. Petrochemicals, oil marketing companies and chemical industry stand to gain.
The American stock market crash of 1929 happened due to borrowed money and margin investing. Something of the very same nature is happening in China leading to the crash.
The Chinese regulator is aiming at providing some stability to the stock market by putting a ban on investors - who hold more than 5% of stock, from selling their stock till 6 months. Lending rules have been relaxed in order to make it easier for people to borrow for investment, hoping that they would buy more stocks.
