CHINAS STOCK MARKET BUBBLE:

-China is the worlds second largest stock market in terms of market

capitalisation ( incase of listed companies, it was 44.93 per cent of
GDP in 2012) , after USA. Chinese stock market index had risen as
much as 110 percent from November 2014 to a peak in June 2015.
-Ever since 12 June 2015, it has collapsed at an incredibly rapid
pace. It has plummeted by well over 20 percent, and more than 3
trillion dollars of paper wealth has been wiped out.
-The value of this massive drop in the stock market is more than the
GDP of Brazil and 20 times the value of Greece debt.
-The Chinese government did constituted a number of extraordinary
measures to try to halt the market's slide over the past month, but,
to little effect.
Reasons for the Stock Market Crash
-Chinese banks offer Wealth Management Products (WMP) for
investment that promises the security of a savings account with
high returns. However, the banks, in turn, invest WMP funds in ways
that are much riskier.
-About 30 percent of WMPs guarantee return of principal, and 70
percent are not guaranteed. But a lot of ordinary investors believe
that their investment is safe.
-For this purpose, the banks use Trust Firms, called, Umbrella
Trusts as conduits, to invest money in funds that piles up capital
directly into the stock markets.

-Besides the banks making indirect investments into stocks, a lot of

common people started buying stocks with borrowed money, a
practice, known as "trading on margin."
-Earlier the Chinese government had imposed a lot of restrictions on
"trading on margin," but the authorities have gradually loosened
the regulations since 2010.
-In order to prevent speculative investments, certain safeguards
were instituted by the government, like only half of the invested
funds could be borrowed and also restrictions on which stocks you
could buy and how long the money could be borrowed, etc.
-Nonetheless, common people of China continued to find unethical
and creative means to invest borrowed money into high risk - high
dividend funds. This practice of making investments with borrowed
funds is known as leverage.
-So, borrowed money flooded into the Chinese stock market
between June 2014 and June 2015, helping to push stock prices up
150 percent.
-Not taking into account the money invested through the back-door
methods, during this period, the amount of officially sanctioned
margin trading in the Chinese stock market ballooned from 403
billion Yuan to 2.2 trillion Yuan.
-In April, Chinese authorities began to institute corrective measures
to restrict speculative investments through margin trading and all
other forms of leveraged investments, which had created an
artificial bubble in the stock market.
-The regulators cracked down on banks using WMPs to fund stock
market investments and stock brokers using Umbrella Trust to help
their customers evade limits on margin trading were banned.

-The government's toughest measures came on 12 June 2015, when

China's securities regulator announced a new limit on the total
amount of margin lending stock brokers could do, while also
reiterating the ban on illicit margin trading through mechanisms like
umbrella trusts.
-Chinese stocks have been falling ever since that June 12
announcement.
-In a nutshell, Chinese government relaxed a rule that had earlier
limited margin trading to the wealthy people only. So, 20 million
people opened stock market accounts in 2015 alone and indulged in
margin trading with leveraged investments. The borrowing
magnified their gains as the market rose.
When the Chinese government restricted margin trading, the stock
began to fall and the leverage magnified their losses too.
Implications of Chinese Stock Market Crash
Short-Term Implications
1.Many ordinary Chinese people had used their complete lifes
savings and in some cases, mortgage their homes to invest in stocks
will be rendered paupers overnight.
2.The investments made into speculative real estate projects or
business ventures, has invariably created an artificial bubble in
those spaces also. The bursting of bubble in these spheres would
further compound the losses of the investors.
Mid Term to Long Term Implications

In the mid-term and long term scenario, the crashing of the stock
market may herald a Chinese economic collapse in 2015 and the
early indicators of the same are given below:
1.Slump in the Industrial Production
Industry has been the major driving force behind the Chinese
economic growth. In February, industrial production growth has
receded to just 6.8%. It was 18.5% during the pre-global recession
era in February 2007.
Fixed-asset investment (the purchase of any physical asset) is a
leading indicator of future manufacturing activity, is also down by
4% from last year.
2.Consumer Spending Fallen Drastically
In order to give an impetus to the industrial growth, the domestic
consumer spending needs to be high, so that reliance on foreign
export can be reduced.
However, due to the market uncertainties, the retails sales in the
present times in China are at its slowest pace in the last nine years.
3.Housing Market in China is Collapsing
The housing market in China makes up about 25% of the economy.
Due to the above mentions reasons, as also, when investors will
default on what they have borrowed, as scrutiny in the housing
market grows, the real estate prices will tumble.
A latest survey regarding real estate trends in Chinas largest cities
shows that 61 out of the 70 major city centres have experienced a
price declines.
4.Chinas National Debt Soaring

Chinas present debt-to-GDP ratio stands at 282%. The same is

considered to be extremely high. In need to be further noted that,
these debt calculations not only include government balances, but
also those of households and non-financial corporations.
Connecting with the previous point, it needs to be noted that half of
all the said loans are linked, directly or indirectly, to Chinas
overheated real-estate market, which is slumping.
Hence, an economic depression in China, causing it to default on
payment of sovereign debts, may trigger another Global economic
meltdown as it happened in 2008.

IMPACT ON WORLD ECONOMY:

China's was an isolated stock market. It had no impact on the world
markets, when China stock indices doubled and tripled in a very
short span of time. So, a crash in China's markets is unlikely to
result in a major impact on other emerging markets.
As regards India, a crash in Chinese stock markets could have no
direct negative impact on India's stock market.
However, indirect impact of Chinas economic slowdown could be
that the consumption of goods and services will decline, which
would adversely affect developed economies like the USA. After all
China is the largest consumer of a number of goods and
commodities in the world.
A major reduction in the consumption of goods and services,
coupled with Chinas inability to honour the debts may herald
another world economic recession.
Some economic analysts also feel that an economic downturn in
China could mean increased investments coming into India,
provided we utilise the opportunity well and execute the economic
and systemic reforms being promised to the investors in double
time.

Whatever be the case, the next two years, i.e. 2015 & 2016 are
going to be highly significant from the point of view of opening a
new chapter in the economic history of India, which even as per the
IMF Report is at a cusp of upward economic trajectory and will
overtake China in its projected growth.