China's Stock Market Collapse Explained - YouTube

China’s 25-year-long evolving experiment with capitalism has seen its per-person wealth

grow by more than 2,000% since 1990.

But this summer, the frankenstein-like, hybrid economy that is China’s system turned on

its creator, forcing the government to take unprecedented action to prevent its collapse.

Although the current system of the world’s most populous country hangs in the balance,

it’s nothing new for modern China, which is used to forging ahead into the great unknown.

This is an explanation of how it reached its current tipping point.

China’s economy boomed the fastest in the 2000’s when nationwide GDP jumped by an

average of more than 10 percent per year.

As the rulers of the country, the Communist Party saw its power cemented by this staggering

pace.

But just as fast as it took off, growth has slowed.

First, with the global recession of 2008 and, after a brief recovery, again sliding steadily

since 2010.

In 2015, China’s growth may dip below 7%, which would be a fantastic rate for a highly

developed country like the U.S., but for China, it’s a huge disappointment, and could spell

big trouble for a Communist Party that needs to keep the country’s economy on the development

fast-track.

After-all, China’s President Xi Jinping has promised his people a “Chinese dream,”

of increasing wealth, well being, and power.

In the last couple years, in an attempt to stimulate growth, Xi’s government relaxed

restrictions on its domestic stock market, opening it to many of its citizens for the

first time.

As the working class suddenly gained the ability to use their savings to try and accumulate

wealth much more quickly than they were used to, the market was flooded with new accounts.

There are now more than 90 million stock traders in China, with nearly half joining in just

the last year alone.

This, and the elimination of other regulations, caused an alarming surge in the percentage

of Chinese stocks purchased with borrowed money.

And with a mind blowing 67% percent of investors holding less than a high school education,

there simply are not enough qualified analysts able to correctly judge the strengths and

weaknesses of companies listed on the exchange.

This tsunami of new, unchecked market activity caused two extremely dangerous things to happen:

The formation of a massive bubble, which sent the value of Chinese companies to highly inflated

levels.

And, In the feverish competition to attract investors,

banks and other fund managers promised astronomical profits that were completely unrealistic.

The Chinese stock market has become a casino, with trades seen as bets, instead of what

they actually are: shares of ownership in a business.

But what truly compounded this dangerous situation was the Chinese government’s decision to

use state-run media to cheerlead investment in the surging market.

It’s optimism grew so blind that the Communist Party began cleaning up its own balance sheets

by selling off state-owned, junk assets at drastically overvalued prices back to its

own people, who were ignorant of the actual risks of these investments.

This kind of free-for-all, every-man-for-himself approach caused the market to soar even higher,

more than doubling in one year, and becoming the second-most valuable market in the world.

But storm-clouds were on the horizon, visible to anyone capable of, and willing to, see

the big picture.

And in late June, that storm came onshore.

In a matter of days, the Shanghai index plunged from a high of 5,100 all the way down to 3,700.

More than $3 trillion was wiped out, and the nation was in shock.

The government immediately hit the panic button, banning company executives and any investor

holding more than 5% of a company from selling any shares; they enacted the nuclear option,

suspending trading completely in companies that together totaled more than 40% of the

whole market; and they’ve been pumping hundreds of billions of dollars back into the market

in a desperate attempt to stop the free-fall.

When the dust finally settles and the sell-off is over, investor confidence will be so eroded,

that the Chinese market could slide all the way back to where it was before the boom began.

If this happens, overall economic growth in China would likely stay well below 7% for

the foreseeable future.

All of this lost credibility may not cause the Communist Party’s immediate downfall,

but the Party will have a significantly more difficult time now convincing the Chinese

people that it knows how to best guide them to their economic dreamworld.

Thanks for watching, like this video if you enjoyed it and found it educational.

For the daily conversation, I’m Bryce Plank.

This video was edited by Brendan Plank.