Attention has recently been drawn to the Chinese stock market after an 18 percent drop over the last two weeks. Although the world has just now began to pay close attention to China, the truth is, the economic and financial problems of the country have been a long-time coming.
The United States and Canada have delisted over 100 Chinese firms because of their shady accounting practices and the Securities and Exchange Commission have stated plenty of times that China completely lacks transparency. Because of this, Chinese companies are able to fraudulently adjust their earnings, revenues, cash flow, and value to alter their share price.
Many analysts believe the falling share prices are an indication that the Chinese economy is tanking. However, even in the past when China experienced an economic decline, their stock prices continued to rise. In the height of their economic crisis of 2009, their stocks gained 50%!
What is really affecting the Chinese stock markets? The Chinese government. Their response to the falling prices has been absurd, freezing trading for a few days when it began to fall but taking no other action whatsoever.
But the Chinese government’s bad decision making can be seen elsewhere besides the stock market. There is a possibility that China will let their currency drop in order to compete with producers in other countries, however doing so would cause a ripple effect throughout the world.
The U.S. is frequently criticized for their mounting national debt, however China’s debt surpasses the U.S. at around $18 trillion. For a country whose average disposable income is $3,500 annually, this debt is a huge problem.
The government, under Communist rule, still discourages competition which leads to little or no innovation in the country, instead encouraging single-state entities with no competitors.
Based on all of these reasons, it is more likely that stocks are plummeting around the world because of China’s long-term economic plummet due to poor government management, not because of China’s stock market.