Rationality of Status

The Chinese economy is slowing down from the period 2006-9 when the economy grew by double digits to become the world’s second largest economy and a catalyst for growth in emerging markets. Chinese companies faced by global recession and a slowing economy are witnessing falling profits. The government sought to correct this adverse situation by softening its lending policies via rate cuts to promote lending. The growth of the Chinese housing and real estate market seem to indicate the Chinese retail investors lowered expectations of the stock market and a growing preference for less risky assets.

The Chinese quest to free float the Yuan received a stunning set back with the devaluation of the currency by its central bank in August 11 of  2015 in an effort to boost exports and create economic expansion. This caused a ripple effect in the currencies of emerging markets hoping to grow through exports to the expanding Chinese markets for industrial imports.

A ripple effect that wiped out $5 trillion worth of currencies from the global investment markets could cause investors to worry. However the sharp rise in stock prices kept the index 43% higher even after the crash on June 12 when the Shanghai Index lost one third of its value. The unexpected optimism came from retail investors in the face of declining economic growth and falling profits, thereby developing the classic bubble which ultimately burst.

In 2009 the Chinese economy grew as much as 14% from a mere 10% in 2006. These double figure growth rates had a tremendous effect on its markets for investments. The unfounded expectations of the Chinese investors made them buy over priced stocks sending the Shanghai Index and Shenzhen Composite to unexpected heights in the first quarter of 2015.

The central bank cut interest rates to promote lending and monetary expansion. This move dammed the downslide in the stock market but the Retail sector is declining while the housing market is experiencing growth. In May of this year Reuters reported 1.2% rise in house prices from data gathered from 70 cities by the National Bureau of Statistics (NBS).

Apropos the stock market crash of June 2015, the price of stocks continues to remain higher than before the crash. Retail sales in the first quarter of this year grew at an average rate of slightly above 10% slowing down slightly in April of this year while the market for housing grew to new heights.



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