China was hit in the summer of 2015 with a market correction, recovered slightly and now it’s going down again. Many investors made money in the Chinese stock market, but it seems that investors are losing their appetite for China.
What are the reasons behind the market correction?
Before the market correction in the summer we saw that the Chinese stock market was growing significantly fast, especially between mid-2014 and mid-2015.
Why the stock market went up in mid-2014 and mid-2015?
– Mainly because people were buying stocks with borrowed money. This used to be strictly regulated by the Chinese government, but in the past years regulations were relaxed.
– Chinese banks were stimulating their clients to invest in the Chinese stock market.
– Normal Chinese citizens started to invest and did this without the full awareness of the risk involved. The percentage of Chinese investors in the stock market compared to the US is relatively small, but they are aggressive and were trading in high volumes by leveraging their trades.
Main reasons why the stock market crashed:
– There was a stock market bubble created by an inflow of new investors expecting to make fast money aimed on a stock market rise. These new investors where millions of ordinary Chinese citizens, buying shares with borrowed money. Creating an increase in the prices too fast and when the stock market started to go down they were forced to sell their shares to pay back their creditors. Now imagine millions of people doing this at the same time without panicking.
Most things in China are unfamiliar to foreigners, even its stock market.
Adivce : Reliable information is the source behind profound investing. One of my personal believes is that my clients should never invest in something they can’t understand. Financial data from the Chinese government about their economy and the financial market are still not fully trusted in the market. It is therefore not easy for outsiders to analyze the full risk and benefits from the Chinese companies and the economy. Others might disagree with me and can make a good case based on the market potential of the economy and its size. Investing in the Chinese stock market is a true gamble which can pay off well or might give you sleepless nights.
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Written bySimon Angelo Avila Snelder
Simon, based in Dubai, is an investment advisor and presently working as a financial consultant with Nasco Middle East. (NASCO active since 1958, has a presence in Middle East, Europe, North Africa and central Asia, the largest insurance broker in the Middle East and the third largest reinsurance broker in France.) Simon has worked, lived and studied in Brazil, Chili, Netherlands, Caribbean and UAE, blogs about the world of finance and advises the expats to make the right move.