Chinese Stock Slide Worries U.S. Investors

By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)

Stocks opened to concerns over the precipitous slide in the Chinese stock market, as investors attempted to piece together what, if any, ramifications the falling Asian stocks means for the global economy.  U.S. stocks traded lower on Wednesday at the opening bell, just as they had done the first two days of the week.  However, this day there was no end-of-day rebound rally like there had been on Monday and Tuesday.  Stocks closed near their lows of the day with the Standard & Poor’s 500 down 1.67 percent and the Nasdaq Composite falling 1.75 percent on the day. 

Concerns over Greece’s next move in their bailout negotiation with eurozone leaders has been put on the shelf for now as their Sunday deadline draws near.  Chinese stocks suffered further losses on Wednesday, with the Shanghi Composite closing down 5.9 percent after falling as much as 8 percent at the open.  Chinese authorities have been taking drastic measures over the past few weeks to stop the decline, but as of Wednesday to no avail, with the Shanghai Composite down roughly 32 percent from its peak on June 12 and roughly $3.5 trillion in value as been erased from companies in their benchmark index. 

Chinese leaders have been able to financially engineer a strong economy for over a decade, so with some now worried that the decline in Chinese stocks could hurt their slowing economy, Chinese leaders appear to be of the mind that they can engineer their way out of the current retreat. 

Their first attempt was to make more money available to Chinese investors to buy stocks by increasing the amount they could borrow on margin.  When encouraging Chinese investors to take more risk didn’t stop the slide, the state-imposed a limit on the selling of stocks, such as stopping all initial public offerings and imposing a six-month ban on stock sales by controlling shareholders and executives who own more than 5 percent of a company’s shares. 

The most surprising of all, however, is that over the past few days, companies have gone so far as to suspend the trading of their own stocks, such that on Wednesday only 85 of the 300 blue-chip stocks that make up the China share index were available for trading.  Further, the Chinese Securities Finance Corporation has been buying stock shares to prop up prices using money from the People’s Bank of China (the Chinese equivalent for our Federal Reserve). 

Watching the Chinese stock market recently is a reminder that your can’t engineer away fear.  So far, the problems in China appear to have more to do with the popping of a stock-market bubble (remember the tech bubble in 2000), which can result in the loss of wealth on paper.  Though U.S. stocks fell in sympathy with Chinese stocks on Wednesday, markets have a way of coupling and then decoupling over a short period of time, and this time should be no different. 

This commentary originally published in the Reno Gazette-Journal.  Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate. 

The AlphaBaskets blog provides frequent market insight and commentary by AdvisorShares Investments, LLC, created by AdvisorShares and other leading active managers.  AdvisorShares Investments is an SEC-registered investment adviser and the investment adviser to the AdvisorShares actively managed ETFs.  The views expressed on AlphaBaskets should not be taken as investment advice or a recommendation for any of the actively managed ETFs advised by AdvisorShares.