China finds itself at the heart of an economic storm of rare intensity. Indeed, the Middle Kingdom has seen no less than 6,000 billion dollars evaporate in two years, a figure that is dizzying and prompts questions about the drastic measures taken in response. Among these, the ban on short selling is a radical decision. Prepare for a journey into the heart of finance, where economic dragons fight against headwinds with armor of greenbacks and sharp swords of regulation.
Red alert on Chinese markets!
While the SP 500 is reaching new heights, the Chinese financial scene has transformed into a theater of operations where the main players, namely investors and regulators, are playing a game with colossal stakes.
The suspension of short selling by Citic SecuritiesChina’s largest state broker, sounds like a cannon shot heralding a pitched battle against invisible market forces.
Other brokers followed suit, banning the use of margin loans for this practice often seen as a downward bet on the health of companies.
The disappearance of $6 trillion since the 2021 peak is both a symptom and a catalyst for panic. Historically, such bans have failed to breathe lasting life back into markets.
They have often even exacerbated the problem by harming liquidity, essential for the healthy functioning of the stock market. Yet, in a desperate push for control, regulators have limited short selling, attempting to close a loophole exploited by investment strategists to the detriment of the small saver.
A titanic rescue plan
Faced with this financial hemorrhage, the Chinese authorities have drawn up a colossal rescue plan of 278 billion dollars. An astronomical sum, mobilized mainly from offshore accounts of Chinese public companies, intended to be injected directly into the economy with, among other things, share buybacks.
The bold move seeks to stabilize a faltering stock market, but its long-term success remains an enigma shrouded in the mists of the future.
The real estate crisis, depressed consumer sentiment and the withdrawal of foreign investment make up an explosive cocktail that is damaging the Chinese economy and financial markets.
In a spectacular withdrawal movement, foreign capital is fleeing the country, exacerbating an already precarious situation. Officials, in an attempt to minimize the impact on a weakened yuan, are seeking to redirect offshore money into strategic investments.
The ongoing stock market crisis is also putting derivatives linked to Chinese assets under pressure, with potentially disastrous consequences for investors across the world. The CSI Smallcap 500 index, to name just one, plunged 4.7% in a single day, illustrating the palpable nervousness of the markets.
In short, the financial situation in China is a stark reminder of the interconnectedness of global economies and how quickly confidence can evaporate, leading to dramatic consequences for economies and individuals. While China is making titanic efforts to contain this free fall, the outcome of this battle remains uncertain. However, China defied the odds at Davos.
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