When a Stock Market Crashes and No One Notices

The Shanghai Index is in a full-fledged crash. It’s down 46.5% this year.

Have you heard about it?

I thought not.

Even though many people are invested in international stocks- apparently not enough care about Chinese stocks.

This isn’t just a “bear” market - which normally is a 20% fall. This is a red alert crash.

Surprisingly, Chinese investors aren’t panicking. That’s mainly because the Chinese government has, in the past, stepped in to prop up the markets and so Chinese investors are conditioned to expect it this time. But with the markets down nearly 50%, what if the government doesn’t step in?

From the WSJ:

Beijing already has taken several steps this year to try to bolster market sentiment. In an effort to calm fears that a flood of new shares would dilute already weak prices further, it announced on April 20 stricter limits on the sale of a large category of stock that was becoming newly tradable. Three days later, it cut a tax on stock trades to 0.1% from 0.3% — after having raised the tax in May 2007 to try to calm a market that was then soaring.

But the effect of both moves was limited and short-lived, and stocks have continued to plunge, as investors worry about the impact of a global economic slowdown as well as Beijing’s own efforts to tamp down surging inflation. The Shanghai Composite had its worst single-week drop in 12 years this month, falling 13.8% in the week ending June 13. On Monday, it closed at 2760.42, down 2.5% on the day and down 55% from its record close in October.

“The government’s interventions in the last six months have not had any lasting impact and, by encouraging investors to second-guess official intentions, they may have increased volatility,” Mark Williams, an analyst from Capital Economics, said in a June 8 report.

In the US- such government “intervention” is called the “plunge protection team” by some people- a mysterious group of government officials who are supposedly tasked with keeping certain asset classes propped up. (This is all “allegedly”, of course. Whether or not the “plunge” team exists remains to be seen.)

Still- a 50% decline in any asset class is scary. Even if the Chinese government does step in soon, the losses are real.

But it’s nice to see there’s no panic among investors. What would happen to the Shanghai Index if a true panic gripped their market?

I shudder to think. It’s already down 50%- can anyone say 75% decline? 80% or even 90%?

Shudder…shudder…