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Will China become the next Greece? Collapse contagion spreading globally as financial fairy tales unravel


Chinese stock market

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(NaturalNews) In recent days markets all over the world have tumbled somewhat as the Greek economy nears collapse and the government there toys with defaulting on billions of dollars in bailout funds it can't pay without changes in the deal.

So imagine, if you can, what would happen to global market if the world's second-largest economy tanked.

And yet, it seriously could happen.

As reported by CNN/Money, China's stock markets are in such turmoil that more than 700 companies are calling it quits.

These firms have stopped trading in a bid to "self-preserve," official state media - which is 100 percent government-controlled - is reporting. Translation: About a quarter of the companies listed on China's two large exchanges, the Shanghai and Shenzhen, are no longer trading at all.

No question, say analysts, that China's markets are in real trouble. The Shanghai Composite Index has collapsed 25 percent since mid-June, Meanwhile over at Shenzhen, which features more technology companies and is akin to the United States' Nasdaq Index, has dropped even further.

As CNN/Money reports, the government is a bit panicky:

The government has taken extraordinary steps to try to prevent further damage. The Chinese central bank made a surprise rate cut at the end of June. Then China's securities regulator stopped initial public offerings on the exchanges.

[Recently], over 20 of China's top brokerage firms publicly pledged to buy back stocks and funds in an effort to slow the downfall. The firms expect to spend at least 120 billion yuan (about $19.3 billion).


Margin buying is 'risky'

"The government is taking good care of the stock market," China's vice commerce minister said in a less-than-honest assessment just days ago.

Investors know better, however, and remain unconvinced. They have been witnessing wild valuation swings where the Chinese markets will open up as much as 5 percent but then end the day down that much, or vice versa.

A couple of days ago, both the Shanghai Composite and Shenzhen fell once more. In all, according to Bespoke Investment Group, China's stock markets have destroyed some $3.25 trillion in assets. That is more money than what is traded in France's entire stock market and about 60 percent of Japan's entire market.

One positive: Few foreign investors have any substantial exposure to the Chinese stock markets, making the real concern for those outside China an overall economic slowdown, rather than major in-country stock market fluctuations.

"We reiterate that selling global risk assets on fears of Chinese 'contagion' driven purely by stock declines is a fool's errand," Bespoke wrote in a recent morning note.

In a separate report CNN/Money noted that the emerging crisis in the Chinese stock market was much worse than anything that could happen to Greece's finances.

"Instead of focusing on Athens, investors should be much more worried about what's going on in China. You know, that country with about 1.4 billion people and the world's second largest GDP?" Paul R. La Monica wrote.

He went onto to opine that despite the steps being taken by the Chinese government to staunch the stock market bleeding, they "could backfire."

He said that Chinese regulators had announced that they are going to make more capital available for an entity that will then allow for even more margin lending - or, "the practice of borrowing money to buy stocks." That kind of purchasing - buying on margin - is very risky.

The next 'Great Recession' could come to China

"Many experts believe the Chinese stock market's surge earlier this year was partly due to average investors taking on debt to invest in stocks," La Monica wrote.

"And when stocks first started to fall last month, many of those investors had to quickly sell their investments to pay back the loans. That fueled an even bigger drop in stock prices."

What's more, the current slowdown in the once red-hot Chinese economy could hurt investors more as profits fall.

"Exuberance for Chinese stocks isn't backed up by fundamentals," Michael Pento, president and founder of Pento Portfolio Strategies, wrote in a report this week. "Instead, it appears markets are being levitated by continued government borrowings and manipulations."

Could China be setting itself up for its own U.S.-style Great Recession? If so, that might just be one economic collapse too many for the world's financial order.

Sources:

http://money.cnn.com

http://www.naturalnews.com

http://money.cnn.com

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