In Mark Twain’s words “History doesnt repeat itself, but it does rhyme”.
The Chinese stock market is crashing, and again one can say the Chinese have failed to learn from history. The main Shanghai composite index has lost 30% of its value in the past 3 weeks and the even more speculative index ChiNext Index has lost 42% of its value in 21 days. The turmoil is now spreading to other Asian markets and global commodities market.
What caused the crash?
The Chinese government, over the past one year encouraged lots of Chinese to invest in the stock market and this increased the number of retail investors to over 90 million people. Millions of ‘speculators’ poured borrowed cash into shares, which inflated prices to unsustainable levels. When prices began to dip, these ‘speculators’ were forced to sell shares to pay back the borrowed funds and cover their losses. This vicious circle of selling has created a panic and has caused stock prices to crash further.
It should be noted that the companies whose shares were rising weren’t actually getting any better due to their fundamentals – the prices were actually rising simple because there was an increase in demand for shares and people were bidding prices up.
Deadly Margin Loans Strike Again
Most of the retail investors who put money into stocks weren’t using their own cash, but using their money to borrow way more money than they had to invest. Swiss Bank Credit Suisse estimated that the figure for borrowed funds invested in the stock market reached between 4.4 trillion yuan ($708.3billion) before the bubble, and this amount is about 9% of the exchange’s entire worth.
This fall in the stock exchange looks like it will continue, and efforts by the Chinese government to stem the losses have failed.
Should Nigeria be worried?
Yes, I will explain in 2 ways:
- Brent Crude oil prices fell below $49 a barrel after the global economic outlook darkened. The world’s biggest energy consumer, china, faces a significant downward pressure on its economy, and china is expected to report growth slowing to 7.2% from a year ago. Oil prices have dropped by more than half since June as output (supply) around the world soared while demand growth slowed.If the Chinese stock market continues with its free fall, demand for oil will most likely reduce further crashing the price of oil which will be unbearable for a country like Nigeria.
- Stock markets do not operate in a vacuum. If the Chinese stock market keeps crashing, confidence in the Chinese economy will shrink and this will see the portfolio of investors shrink, and people will start selling their stocks or over-inflated houses. The Chinese will resort to selling Gold, and if gold prices fall significantly (say by 15%), there is a chance panic will come to India as well because the government of India are holding onto a lot of Gold. The spillover from the Chinese markets will affect the Indian market and possibly slow down their economy also. It is worth noting that India is now the 3rd highest importer of oil in the world and Nigeria’s No 1 buyer. This will reduce the demand for Nigeria crude further worsening the situation of a mono-product economy like Nigeria.
Hopefully, the Nigerian Government goes beyond tightening its purse to aggressively pursuing other sources of generating revenue beyond ‘oyel’.