“The more you sweat in times of peace, the less you bleed in war.” General Chiang Kai Shek of China
China is having a tough time right now. The Shanghai Composite has dropped 35% in less than a month. When 80% of a market’s participants are retail investors speculating with borrowed money, this sort of volatility shouldn't be surprising.
The decline has erased more than 3 trillion dollars of gains. Compared that to the Greeks attempting to renegotiate payments on a paltry 60 billion Euros of debt that mature in the next 5 years. After this decline, the Shanghai market is still up for the year (as the S&P 500 turns negative for the year).
As second quarter earnings season gets underway this week, we learn if US companies took appropriate measures to minimize the effects of these global problems. By comparing the European and Chinese economies to the US, it’s unlikely that they are outside the blast radius of these events.
The time to enact safety measures to protect against this sort of volatility was a last fall when the European Central Bank, concurrent with the end of Quantitative Easing in the US, initiated their own stimulus program.
The Peoples Bank of China (PBOC) is sweating out their market decline by announcing several rushed solutions that are destined to exacerbate problems. Short term selling restrictions offer temporary relief but real price discover will occur when (and if) they lift them. Time will tell.