And it's not a one day thing. The Shanghai Composite is at 3,507, down from a high of 5,166 on June 12. In the last three weeks, the Chinese government has cut interest rates, compelled nominally private brokerage firms to commit to buying billions of dollars in stocks, and promised more stabilization measures in an effort to restore confidence and arrest the slide. Many stocks yesterday dropped 10 percent in value—the maximum allowed before regulators suspend trading on those stocks. Last November, when the Chinese market was opened up, in a limited fashion, to outside investors, the Shanghai Composite was lamented as "virtually flat." By April of this year, a six month rise had led to worry about a bubble being formed. In May, Morgan Stanley noted concern over valuation in China's stock markets, downgrading it from Overweight to Equal Weight.
Chinese investors tend to be highly leveraged, meaning they borrow against their assets to purchase stocks, which aggravates the panic sentiment, leading to yet more sell-offs. There are more than 90 million investors in China—it's less than 10 percent of the 1 billion-plus population but more than the rolls of the Chinese Communist Party, which numbers 82.6 million. China's commercial banks are anything but, serving largely as tools of the state. And while the Communist Party said it was making reform of state-owned-enterprises a top priority, and last year permitted the opening of a few privately-financed banks, it's the state apparatus the government will rely on now to stem losses.
China's rising middle class has helped the Communist Party survive and thrive because times appeared to be good. The Chinese government has consistently cracked down on dissent, and no formal opposition party to the government exists. It makes China the envy of authoritarian-minded commentators like The New York Times' Thomas Friedman, who argues China is better governed than the U.S., because of that lack of opposition and the gridlock that comes with it. Layer upon layer of regulations helped cause the 2008 financial crisis in the U.S., but opposition to regulations helped the ruling party perpetuate the myth that deregulation caused the crisis. The Chinese government, on the other hand, will be hard pressed to find anyone to blame but itself.