Growing concerns over China’s stock plunge

Concerns are growing over Chinese stock market crash. The Shanghai Composite index closed at 3,686 on Friday, dropped by 28.6 percent from a record high for the year on June 12. China’s stock market rout has wiped out 2.4 trillion U.S. dollars over the past three weeks, which is 10 times larger than the GDP of Greece in 2014. As the Chinese stocks repeatedly have undergone collapses on Friday over the past three weeks, which is commonly known as Black Friday, the stock market has been awash with panic.

The Shanghai Composite index seemed overheated as it had surged by 152 percent over the past year. In spite of slowing down economic growth rate in China, the stock prices have skyrocketed mainly because of the "blind investment" by individual investors, who took credit loans to finance stock purchases. Sudden crash of the Chinese stock market, where 12 million new stock accounts were opened during May alone, is like a signal that heralds a bubble burst. “Greece`s full-blown debt crisis and Puerto Rico`s unfolding one have dominated headlines all week, but some of the biggest U.S. investors have China at the top of their worry lists,” said Reuters.

China’s brokerage firms announced they would spend 120 billion yuan (approx. 19.3 billion dollars) to stabilize the crashing stock market. The industry has added an emergency stimulus plan for the stock market stabilization as the Chinese government’s measures failed to take effect, including lowering the benchmark interest rate and the deposit-reserve ratio, easing credit crunch and cutting securities transaction fees, which have been released from the end of June to July 1. However, it remains to be seen whether such stimulus plans can fundamentally turn the investment sentiment around amid grim prediction that China’s economic growth rate in the second quarter will be lower than originally-expected.

China’s current margin-debt ratio is around 20 percent of the free float. Industry insiders are saying that the risky margin lending in the Chinese stock market is a "Chinese subprime," similar to the Subprime mortgage loans that triggered a global financial crisis from the U.S. in 2008. If the stock market continues to plunge, it will lead to shrinking consumption, which in turn will serve as an unfavorable factor to the real economy. The "Shadow Banking," loans from alternative lenders besides regular financial institutions such as banks, reaches 4.5 trillion yuan in the aggregated amount. This is a potential ticking bomb that threats the future of Chinese economy.

While the Korean economy suffers from weak domestic demand and sluggish exports, concerns are growing over possible two external challenges from Greece and China. Korea’s local stock market KOSDAQ is now booming in seven years. However, it is not entirely welcoming due to signs of overheating in the stock market. To prepare against bubble burst from China, Korea’s biggest trade partner, it is essential to inspect safeguard measures in the local financial market and to revive the real economy. The most urgent task for now is not to miss the right time for policy implementation by passing the supplementary revised budget bill in the National Assembly.