Chinese Stock Market Reels Amid Banking and Housing Bubble Concerns

Jacob Harper  |

US investors, still reeling from uncertainty over the future of the Fed’s stimulus program, got hit with more bad news today from the East. China’s stock market, the Shanghai Composite Index, plunged, dropping over 5 percent to cap off a slide that started back in May.

Analysts are likewise beginning to take a more bearish opinion on China’s future economic growth. HSBC Holdings lowered its expectation for the growth of China’s GDP, from 8.2% to 7.4% for 2013, and 8.4% to 7.4% in 2014.

Fitch analyst Charlene Chu offered a dire assessment, and said “the credit driven growth model (in China) is falling apart.” Chu pointed to ‘shadow banking’ – unrestricted nonbank lending – that has become endemic in China, driving up interest rates. Two Chinese banks, Minsheng and Industrial, lost over 10 percent of their value before trading was halted. The Chinese central bank has so far declined to inject cash into the volatile system.

Overzealous real estate development In China has also raised concerns. Since China began allowing people to buy homes fifteen years ago, the country has seen a robust housing market boom. Hong Kong-based financial analyst Gillem Tulloch claims it has become common practice for wealthy Chinese to put their money into the healthy real estate market as the banking industry continues its wild ride. Tulloch questions the soundness of this practice, pointing to the rapid proliferation of Chinese ghost megalopolises.

Estimates estimate the number of new ghost cities appearing each year at 12 to 24. Property prices in the ghost city of Zhengzhou jumped 14 percent this year alone – yet thousands of units in the city remain uninhabited. And the newly constructed Kangbashi district in the inner Mongolian city of Ordos was expected to eventually house over a million people. Government figures put the number of current residents at 28,000. China plans to soon levy a real-estate tax on incremental housing to restrain property prices and curb unrestricted construction and speculation.

Chinese president Xi Jiaping has called on more direct Chinese involvement and a general liberalization of Chinese economic policy to maintain growth and encourage investment. Despite this, the likeliness of a continued slowdown or even total stagnation of Chinese economic growth remains uncertain, with some analysts like Market Studies’ CEO Tom DeMark even predicting a rapid turnaround in July. But for US investors, some of the only good news has come from investments that take a more dim view of the Chinese economy.

ProShares UltraSHort FTSE/Xinhua China 25 (FXP) is up 3.84 percent to $25.67 a share. One of the top-performing investments is Direxion Daily China Bear 3x Shares (YANG) ETF, which aims to achieve “300% of the inverse (or opposite) of the performance of the BNY Mellon China Select ADR Index.” That ETF is up 7.13 percent to $59.07 a share.

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