China's weakened stock market has ripple effects
Since June 12, the Shanghai Composite Index, the leading Chinese benchmark for stocks, has lost a third of its value, including a 6 percent drop Wednesday that shook global markets.
Since June 12, the Shanghai Composite Index, the leading Chinese benchmark for stocks, has lost a third of its value, including a 6 percent drop Wednesday that shook global markets.
"The number of people involved in the decline may total in the tens of millions. Some of them probably lost their life savings," said stock market scholar Jeremy Siegel, a finance professor at the University of Pennsylvania's Wharton School. "It's very much like a market in a bubble."
China's stocks are back to the levels of last spring, so many longtime investors are not feeling absolute pain yet, Siegel added.
But private lenders who financed stock buys with borrowed money "have been wiped out," revealing the second-largest economy's shaky private finance network. And despite government attempts to push institutions to buy stock and limit sales, "it's likely the market will decline further," Siegel said.
David Hoffman, chairman and cohead of global fixed income at $66 billion-asset Brandywine Global Investment Management in Philadelphia, said, "China was trying to pump up their stock market, to allow more state-owned enterprises and other companies to sell stock and reduce their debt. This certainly puts a damper on that project."
Hoffman noted that less-volatile China B shares, the ones most often bought by Western investors, are still trading within the range where prices have bounced over the last five years.
"Sometimes the stock market is the engine for what goes wrong. This time, I think it's the caboose," Hoffman added.
That nation's "real economy" of manufacturing and export industries has stalled, reducing world commodity prices. The big danger is that "if this causes Chinese to doubt their leaders' ability to manage the economy, the property market might have a similar reaction, and those prices would deflate. That would be much more serious."
China could respond by cutting interest rates, hurting savers.
"This is a long-overdue taking out the trash," added Dan David, cofounder of Skippack-based GeoInvesting, which researches China stocks for short sellers and other investors, and has targeted many Chinese companies it says exaggerated their assets and profits.
China's lack of transparent financial reporting, favoritism toward companies tied to government officials, and failure to prosecute fraud by Chinese companies against foreign investors prepared the market for the bubble, David said.
Will China's stock plunge slow the world economy? Communist leaders' latest economic prescriptions, including the Iron Silk Road rail network, "will take some time to really take shape," said Ann Lee, who teaches economics at New York University, in remarks on the Knowledge@Wharton Sirius radio program Wednesday.
At least cheaper oil, which has dropped in price as China's demand slowed, will ease recovery, she added.
Thanks to massive past exports to the United States, China still has "trillions of dollars of foreign reserves. It can use those reserves to stimulate the economy," Lee said. "China's not going to fall apart like Greece."
Editor's note: Brandywine Global Investment Management's assets under management total has been revised from the value listed in an earlier version to an updated total the company supplied after publication.
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