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Chinese Economy; Speed Bump or Crash?

by | October 1, 2015

Chinese Economy; Speed Bump or Crash?

by | October 1, 2015

Seeing the nature of our company, employees of 1421 Consulting Group (1421) get a lot of questions about the seeming economic decline which has occurred over the past period in China. We understand like no others that lately the Western news has sketched a situation which might be of concern to people. However what is the real situation and what does this situation entail for local entrepreneurs and WFOE owners alike, including 1421?

To provide a good overview of the consequences, it is perhaps wise to recap what has happened in the Chinese economy over the past months. The mayor point of concern has been the three crashes of the Shanghai stock exchange. On the 12th of June the stock market began to plummet within three weeks’ time, falling over 30 percent. On the 27th of July, after three stable weeks, the Shanghai Index fell again with 8.5 percent. Finally, on August the 24th there was a final “Black Monday” where again 8.49 percent of its value was lost, followed by Tuesday the 25th with a loss of over 7 percent.

Shanghai stock exchange

Seen over the year, these three major drops of the Shanghai stock exchange caused the stock market to slightly decreased since January 2015. Starting December 2014 the Shanghai stock exchange was on a rather rapid rise. In the lead up to the crash individual investors have inflated the stock market through massive investments. As a result investors then faced the so called “margin calls” on their acquired stock. Margin calls required the individual investors to pay funds. If unwilling or unable, the broker can sell the investor’s securities. Seeing many of the individual investors bought the stocks with loans, they started to sell their stocks amass, leading up to the crash.

But what is the influence of the crash of the largest stock market in China on the Chinese economy? We Western people see and feel the importance of our stock exchanges on our economies, but is that the same in China?  Although the Chinese government’s actions after the three crashes seem to imply that the influence on the Chinese economy is equal to the Western economy, the reality is different. The so called free-float value of Chinese markets combined, which is the amount available for trading, is less than a third of the Chinese Gross Domestic Product (GDP). In Western economies the free-float value is more than 100%. The amount of household financial assets invested in the Chinese stock market is also very low, under 15%. Who then did suffer from the crash? Mainly international companies have led heavy losses.

Obviously the bad news will influence the positive public opinion about the economy but is there any sense of panic amongst the people? If you look at the streets of all the big cities, you see and feel the economy is still on the rise. The influence therefore on the local entrepreneurs and WFOE owners is not measurable, if present at all. For Western companies considering the Chinese market the advice would remain the same, if it strategically fits your company, the Chinese market remains one of vast opportunities. As for concerns about 1421; we are happily looking forward to the prosperous future of China and ourselves.

What happened in the year 1421?

From 1421 to 1423, during the Ming Dynasty of China under Emperor Zhu Di (朱棣) the fleets of Admiral Zheng He (鄭和), commanded by the Chinese captains, discovered Australia, New Zealand, the Americas, Antarctica, the Northeast Passage; and circumnavigated Greenland.

Due to this endeavour we can conclude that “1421 is the year that the Chinese discover the world”.