Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
This Dividend Aristocrat Is Leading the 5G Revolution - 22nd July 19
What the World Doesn’t Need Now is Lower Interest Rates - 22nd July 19
My Biggest 'Fear' For Silver - 22nd July 19
Reasons to Buy Pre-Owned Luxury Car from a Certified Dealer - 22nd July 19
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

China Stock Market Crash Echoes of 1929

Stock-Markets / Chinese Stock Market Jul 09, 2015 - 03:16 PM GMT

By: ...

Stock-Markets

MoneyMorning.com Shah Gilani writes: You've heard the stories about the 1929 stock market crash, how investors should have figured out that, when taxi drivers and shoe-shine boys hawked stock tips, the end was near.

The lesson we're supposed to have learned was that cheap margin – the debt that investors can use to finance stock purchases, when wielded by uneducated, blindly optimistic "plungers," can drive stocks up and up over a cliff into an abyss.


Too bad the Chinese never got that memo.

China is now facing a 1929-style stock market crash thanks to rampant margin buying by millions of new investors who believe the market is the road to riches.

But it's not just Chinese plungers or the Chinese economy that's going to suffer.

A 1929-style crash in China will send shock waves around the globe and to your door.

Here's what's really happening and what you can do to protect yourself and even profit from the fallout…

Up, Up, and Away

There are three principal Chinese stock markets: the Shanghai Stock Exchange, where most big company "blue-chip" stocks are traded; the Shenzhen Stock Exchange, where some big and mostly middle-market company stocks are traded; and "China's Nasdaq," known as ChiNext, where mostly small, speculative companies trade.

Stocks on those exchanges, after running up wildly over the past 12 months, are now all selling off.

The Shanghai Composite was up over 100% in the past 52 weeks. It's still up 83% according to optimists, who prefer not to admit it plunged 26% in the last three weeks. The Shenzhen is down almost 30% in the same few weeks after being up 150% in the past 52 weeks and up 60% just since January 1 of this year. The ChiNext is now down 40% from its June highs.

New "investors" are mostly to blame for the run-up and the sell-off as they get hit with margin calls as prices topped out and began falling.

The Perils of New Money

Millions of Chinese have been opening up brokerage accounts and taking the market plunge.

According to the China Securities Depository and Clearing Co., in the last week of April, nearly 1.7 million new brokerage accounts were opened across China. Over a two-week period earlier in April, 2.4 million new accounts were opened. On average, since the beginning of 2015, almost 170,000 brokerage accounts a week have been opened.

Most of the new accounts have been opened up by many of China's least-educated investors.

According to data compiled by Bloomberg, there's a big difference between "Existing Investor Households" and "New Investor Households."

The highest level of education for 7.7% of existing investors is elementary school. A total of 5.8% of new investor households are "not literate," and 25.1% only have an elementary school education. A total of 18% of existing investor households have a junior high school education, while 36.7% of new investor households have only a junior high school level education. High school percentages for existing households is 28.1%, while only 14.7% of new investor households finished high school. The numbers get a lot smaller all the way up the ladder for new investor households.

Are a lot of these new investors in the same category as taxi drivers and shoe-shine boys? Maybe. Although it doesn't matter if they are farmers or factory workers, it does matter that they probably aren't educated enough to understand how capital markets work and that stocks don't always go up.

Leverage, Leverage, Leverage

It's one thing to give an uneducated person a gun; it's quite another thing to give them bullets, too.

Almost every account that's been opened in China comes with a margin agreement and access to margin. Margin lending is big business in China, as it is here in the U.S.

But in China not all lending comes from brokerages. The shadow lending market all across China provides loans to almost anyone who has anything, even of questionable value, to put up as collateral. In the case of borrowing to buy shares of stock, borrowers put up their shares of stock as collateral for loans to buy more shares.

Shadow lenders include "trust" facilities, manufacturers with capital to lend, insurance companies, special-purpose vehicles set up by individuals, companies, brokerages, banks, local government entities, and others. There's plenty of money to borrow in China, because the central government wants growth at any price.

Institutionally, brokerages lend on margin, with purchased shares as collateral, against their own capital.

Last week the Peoples Bank of China quadrupled the capital of the state-owned China Securities Finance Corporation (CSFC), the entity that funnels margin money to brokerages for their customers. That wasn't to extend more margin to bleeding customers; that was to backstop the CSFC itself because its own capital had been exhausted lending to brokerages who desperately needed to pump more margin to new accounts bleeding money from falling stocks.

Plainly, when uneducated investors are allowed to leverage themselves to the hilt to chase momentum-driven shares higher and higher, they will reach the proverbial cliff.

In spite of everything Chinese authorities and regulators are doing to shore up the stock market, there's a better than 50% chance their efforts will fail and that a devastating crash could send global markets back into a 2008-era financial crisis.

The China Crash Play

That's where Chinese markets are now. We'll see soon enough if the authorities' efforts to stick their thumbs in the dam of swollen stock prices can stem a 1929-style crash.

If they can't, U.S. investors will face the tide of retreating stock prices on our shores as contagion will spread throughout the global, interlinked economy.

Investors here need to have stop-loss orders in place to exit their positions in the event of collateral damage to our markets.

And, if you want to make money on a potential contagion crash here, short the market by buying an inverse ETF like the ProShares Short Dow30 (ETF) (NYSE Arca: DOG).

Or, take your own plunge if you see a huge sell-off coming and buy a leveraged inverse ETF like the ProShares UltraShort S&P500 (NYSE Arca: SDS).

Just don't be under-educated and over-leveraged when it's time to take your plunge.

Source :http://moneymorning.com/2015/07/09/chinas-stock-market-echoes-of-the-1929-crash/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules