After the dramatic net drop in the U.S. stock market, nervous investors in China watched in shock as their financial markets dropped $660 billion so far. Even the Yuan lost 1.2 percent just last Thursday alone.
China\'s stock market and the yuan are both feeling pressure as selloffs continue. Photo: Trillions
The selloff in China included stocks for large cap corporations and banks. In other markets such as the U.S., when the market drops as it has in the last few weeks, investors at least have other places to move their money – such as Treasury Bills or other long-term financial vehicles which tend to go up when everything else goes down. In China those options are not in good shape either. Government bonds are suffering, and pure commodities are also dropping in value.
This is also all happening just a few days before the beginning of the Lunar New Year. At this time there is typically tighter liquidity in all Chinese markets.
When 2018 started, China’s markets were looking strong. The onshore yuan appreciated in value more than any other Asian currency. The Shanghai Composite Stock Index also went up for almost every single day in January.
The first signs of stress in the Chinese market this year came long before they U.S. selloff last week. They included indicators saying that consumer staples, financial, and energy investment vehicles in China were at an overbought level and in need of correction. So when the U.S. market plunge spread to Asia, these were among the biggest losers in the Shanghai markets.
Most analysts so far say this should be considered an understandable correction after an over 742-day growth streak as measured by the Shanghai Index. That run was the longest in history. Sellers are taking their profits, with an impact that is now spreading past the currency markets into all other Chinese indicators. It will likely continue for a while and will put pressure on China’s state-backed funds, its so-called ‘national team’, to consider getting involved to stabilized markets if the stock market drops become too volatile.
Regardless of the cause, a lot of cash has now been sprung loose from the rapid sales of the market. There is now the opportunity for reinvestment. It will be worth watching what portions of the economy will now benefit from that, and how long the current stock market volatility will continue in China.