Chinese Share Market Bubble Burst
The Shanghai Composite Index dropped over four per cent in intraday trade on 23rd June 2015. The front line index has already fallen by 17 per cent in last six sessions and trading in the range of 4450. This may be a kind of start of bubble burst over ultra bull market. However, Chinese policy makers view a 12-month forward PE ratio of 20 as a signal of overvaluation for the broader market. Chinese market capitalisation has tripled over the past one year to USD 9.8 trillion. According to the survey of Southwestern University of Finance and Economics in Chengdu revealed that over two third of new investors had less than a high school education in late 2014.
The US index provider MSCI delayed inclusion of Chinese A shares and proposed that China must liberalise its capital markets. Earlier in March 2014, MSCI wanted Chinese A shares to be included but cancelled because country had not taken sufficient steps to facilitate investment in its markets. China listed shares remain in review list of 2016 for potential inclusion into its emerging market index. The country disappointed and failed its attempt to promote its yuan currency globally and attract foreign funds with faster financial reforms were the other reasons for not including in emerging market index.
The bubble trouble for Chinese stock markets is because of certain reasons such as complete absence of fundamental support, a series of IPOs that locked up funds in escrow, tightening of margin financing and generally tight money conditions in the run-up to the end of the first half of the year. According to a survey 7 out of 10 global investors feel that Chinese stock market is showing signs of bubble. GDP growth of China in the first quarter decreased to 7 per cent on yearly basis slowest since 2009. Exports growth from the country declined to 6.4 per cent in April in consecutive manner and imports too down for six months. The Chinese central bank has cut interest rates three times in past six months to encourage the economy.
Chinese share market crash will benefit Indian equity market as foreign investors will invest in the country. The biggest net gainer would be India, with relatively small exports of manufactures and business services to China at risk. India would emerge as high growth emerging market, with balanced and therefore sustainable 8 to 10 per cent growth.
There was a China's big burst in 2007 than year after global market crashed and took almost seven years to recover. The new Chinese stock market bubble may about to burst and may impact global financial markets once again.