China's Stock Market Unnerves Investors With Another Nosedive

Transcript

STEVE INSKEEP, HOST:

Let's ask what's really happening in China. That country's stock market has unnerved investors with yet another plunge. On Monday, prices on China's biggest exchange fell 8.5 percent in a single day. Today, shares opened down again. All this follows a big drop in June and a failed government effort to prop up the market. Patrick Chovanec is tracking all this at Silvercrest Asset Management.

PATRICK CHOVANEC: One of the things that's happened in the past year is that the Chinese stock market more than doubled. And this happened at a time when the Chinese economy was clearly on the rocks. So there was a disconnect between what was happening in the stock market and what was happening in the economy. And at some point, reality caught up and the stock market went down. But all along, people expected the Chinese government would essentially guarantee stock prices. And when push came to shove, they felt like they had to do it. For a while, they succeeded. But just in the past day or so, the bottom's fallen out again.

INSKEEP: Well, give us a little more detail on what's been revealed here. Of course, people know China as a great rising power, the second-largest economy in the world that's expected to overtake the United States in size at some point. What else should we know, and should we be taught by the events of the last month or two?

CHOVANEC: They've had this credit-fueled investment boom that has kept growth going, but it's also created a lot of imbalances and a lot of problems in the Chinese economy. So they need this adjustment. And actually, they need to go through this adjustment. So while people are concerned that the Chinese economy is slowing, in some ways, it's something that needs to happen.

INSKEEP: Who's got money in, say, the Shanghai market? It's - we're told there aren't actually all that many foreign investors there?

CHOVANEC: That's right. This has mainly been driven by domestic investors, both on going up and going down. That's actually important to note both because our limited exposure, the least direct exposure, to this bubble bursting. But also because in recent days, Chinese - China state media has been vocal about blaming foreigners for the stock market route. And, in fact, foreigners play a very small role in the Chinese stock markets. So people might want to believe that, but, in fact, this is something that's homegrown.

INSKEEP: Well, it's very interesting that you say that because that suggests that the drop in the market reflects a direct loss of confidence among Chinese investors.

CHOVANEC: Yes. For a long time, they believed that the stock market would go up because the government essentially would guarantee that it went up. But this isn't the first time this has happened in China. In 2007, the stock market tripled in the course of 12 months. And then it peaked in October of 2007. And it fell and lost all of its gain over the course of the next 12 months. And this was before the global financial crisis. Now, interestingly, last time, the Chinese government did not actively try to intervene and prevent the stock market from going down. And it actually didn't have that much of a detrimental effect on the Chinese economy. They've been intervening, and they've been buying up shares very aggressively for the past several weeks. In fact, one Chinese investment bank estimates that the government directly has purchased about 5 percent of the total market's load. And that they've encouraged brokerages and Chinese companies to buy up a whole bunch more.

INSKEEP: Wow, the idea of the government just buying masses of shares, that's reminding me of, like, the moment before the final stock market crash in the '20s in the United States. Didn't, like, a bunch of investors try to just keep buying up shares to prop up the market and finally ran out of money?

CHOVANEC: Yes, and it didn't work. History's shown that you can succeed at it for a little while but not for very long.

INSKEEP: Yeah. Patrick Chovanec, managing director of Silvercrest Asset Management Group in New York. Thanks very much.

CHOVANEC: You're welcome. Transcript provided by NPR, Copyright NPR.