BY MILKA SANTANA GALVEZ DE LEÓN
Chinese investors thought Xi Jinping had the godly powers required to control the shares of thousands of companies. They were up for a surprise worth US$4 trillion in losses.
From the end of last year to June of 2015, the Shanghai Composite Index and the Shenzhen exchange were up 135% and 150%, respectably. Millions of Chinese citizens joined what some called “Uncle Xi’s bull market”, flocking to brokerage houses all across the country. The experience of buying stocks was thrilling and the returns were unbelievably higher than the 2% savings account rate offered by Chinese banks. Gambling is illegal and the markets became a casino. It seemed the Chinese state-controlled media was encouraging citizens to invest. Newspapers referred to the increase in stock prices as: “only the start of a bull market” and “massive investment opportunities.” This was exactly the assurance many needed to place their life’s savings into a risky venture and ignore the facts. And what were these facts? First, in order to rationalize this dramatic increasing trend, the changes you’d expect in stocks’ fundamentals were absent. Meanwhile, the price-earnings ratios were accessibly high; a warning sign for bubbles. And most importantly, as daily American media headlines were happy to remind the world, the Chinese economy was actually slowing down. Everyone following equity markets knew this was a huge bubble about to burst. And just guess what happened?
In July, suddenly everything soured. The Shanghai Composite Index tumbled by 32%. That was also around the time Xi Jinping’s market manipulating powers were in full display for the world to see. The government cut interest rates, devalued the Renminbi and reduced bank reserve requirements to allow more liquidity into the economy. Authorities dashed ahead and threaten shareholders they would be prosecuted for short selling. They also “encouraged” (or in Chinese “forced”) companies to buy back their own stocks. Suddenly, issuing IPOs was also suspended to prevent investors from selling their current stocks in order to buy newly issued shares. And to take the market manipulation levels up a notch, shareholders that owned a large amount of stocks were banned from selling their shares. That is correct: The Chinese government told the owners of investments that they were not allowed to do exactly what legal ownership of an investment is meant to protect.
These blatant market maneuverings were partly enabled by the fact that the Chinese equity markets have zero transparency. It’s a black box. Yet, Chinese citizens accepted it and still chose to invest because they were under the impression that Xi Jinping was going to save them. Turns out he’s not God. Markets continued to crash in August and September resulted in extreme volatility. The Chinese government failed miserably in their attempts and manufactured a colossal public relations problem for the president. Unsurprisingly, millions of Chinese investors are enraged. More crucial to China’s foreign relations, the world was watching. Many thought Xi Jinping was in control, but it seems the entire Communist Party was rolling the dice themselves.