Yesterday Would Have been a Good Time to Get Out of China's Markets

Daniel Banas |

Chinese New Year isn’t until February, which is probably good news, because anyone who still has money in the Chinese stock market will probably want a fresh start after today, the first day of trading for 2016. This morning, China’s benchmark Shanghai composite index fell 6.9% to 3,296.66, while the Shanghai Composite Index fell 8.5% to close at 3.209.91. That’s the market’s lowest level in almost three months - which is saying something, considering the market already experienced a historic crash last summer after peaking in June.



Worse still, the reverberations are being felt around the globe, with the Dow plunging 400 points (about 2.3%) in early trading and the Nasdaq and S&P posting similar declines. The drop in Chinese stocks has been blamed on a number of factors, including, weak onshore performance and investors moving out of yuan-based assets after the currency’s devaluation in August. Another factor might have been data released over the weekend showing a fifth straight month of contraction in China’s manufacturing sector, fueling fears of a long-term slowdown in the Chinese economy. This might have been enough to convince anyone who still has money in China’s markets to cut their losses and high-tail it outta there.

Stay in the Black by Avoiding the Reds

Since China’s massive devaluation began, an astonishing more than $5 trillion has been wiped from the value of global equities markets. So does that mean that now is the time to invest in the second largest economy in the world? Not so fast: most economists agree that China will record its lowest growth rate in a quarter of a century this year, thanks to these myriad issues.

Excess capacity, substantial government debt, weak demand for commodities and a government that refuses to let the market go through anything close to a natural contraction are all huge hurdles that investors in China will face before they’re back in the black. In fact, considering the wide-scale effects of the crash, you’d probably be best to avoid stocks in general. Either that or read up on shorting...

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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